AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 30, 2006
REGISTRATION NO. 333-_____
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
IBT BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MICHIGAN 6712 38-2830092
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER)
JURISDICTION OF INDUSTRIAL IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NUMBER)
200 EAST BROADWAY
MT. PLEASANT, MI 48858
(989) 772-9471
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DENNIS P. ANGNER, PRESIDENT & CEO
200 EAST BROADWAY
MT. PLEASANT, MI 48858
(989) 772-9471
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
COPIES TO:
MATT G. HREBEC, ESQ. DAVID W. BARTON, ESQ.
FOSTER, SWIFT, COLLINS & SMITH, P.C. BODMAN LLP
313 SOUTH WASHINGTON SQUARE 229 COURT STREET
LANSING, MICHIGAN 48933 CHEBOYGAN, MICHIGAN 49721
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective and satisfaction
or waiver of the conditions to the proposed merger transaction, as described in
this Registration Statement.
If the securities being registered on this form are to be offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box: [ ]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED SHARE OFFERING PRICE FEE
--------------------------- ----------------- ------------------ ---------------- -------------
Common Stock, no par value
per share 797,528 shares (1) $8.8506 (2) $7,058,601 (2) $756.00 (2)(3)
(1) This amount represents a bona fide estimate of the maximum amount of IBT
Bancorp, Inc. common stock to be offered based on the amount and form of
consideration to be issued pursuant to the proposed transaction and the
number of shares of common stock of The Farwell State Savings Bank
outstanding as of June 1, 2006, plus additional shares available to be
issued in the event additional shares are required before the effective
time of the merger.
(2) The registration fee has been computed pursuant to Rule 457(f)(2) and Rule
457(f)(3). Pursuant to those rules and solely for purposes of calculating
the registration fee, the Proposed Maximum Offering Price Per Share and the
Proposed Maximum Aggregate Offering Price have been calculated on the basis
of the book value of the common stock of The Farwell State Savings Bank at
June 1, 2006, less the cash to be paid in connection with the transaction.
(3) Calculated by multiplying (a) the proposed maximum aggregate offering price
for all securities to be registered ($7,058,601) by (b) 0.000107.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES
ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH
DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
THE FARWELL STATE SAVINGS BANK
399 WEST MAIN STREET
FARWELL, MI 48622
NOTICE OF THE SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON _______________, 2006
NOTICE IS HEREBY GIVEN that a special meeting of the shareholders of The Farwell
State Savings Bank will be held at ________________________________________,
Michigan, at _____ __.m. Michigan time, on _______________, 2006, for the
following purposes:
1. To adopt the Amended and Restated Agreement and Plan of Merger by and between
Farmers State Bank of Breckenridge, The Farwell State Savings Bank and IBT
Bancorp, Inc., dated as of May 2, 2006, and the transactions contemplated by the
Merger Agreement.
2. To transact any other business that properly comes before the special meeting
of shareholders, or any adjournments or postponements of the special meeting,
including, without limitation, a motion to adjourn the special meeting to
another time or place for the purpose of soliciting additional proxies in order
to approve the Merger Agreement and the merger or otherwise.
The proposed merger is described in more detail in this proxy
statement-prospectus, which you should read carefully in its entirety before
voting. A copy of the Merger Agreement is attached as Appendix A to this
document. Only The Farwell State Savings Bank shareholders of record as of the
close of business on _______________, 2006, are entitled to notice of and to
vote at the special meeting of shareholders or any adjournments of the special
meeting.
YOUR VOTE IS VERY IMPORTANT. TO ENSURE YOUR REPRESENTATION AT THE SPECIAL
MEETING OF SHAREHOLDERS, PLEASE COMPLETE, EXECUTE AND PROMPTLY MAIL YOUR PROXY
CARD IN THE RETURN ENVELOPE ENCLOSED. This will not prevent you from voting in
person, but it will help to secure a quorum and avoid added solicitation costs.
Your proxy may be revoked at any time before it is voted.
BY ORDER OF THE BOARD OF DIRECTORS
----------------------------------------
Herbert R. Miller, Chairman of the Board
Farwell, Michigan
_______________, 2006
THE BOARD OF DIRECTORS OF THE FARWELL STATE SAVINGS BANK UNANIMOUSLY RECOMMENDS
THAT YOU VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY CARD PROMPTLY, WHETHER OR NOT YOU
PLAN TO ATTEND THE SPECIAL MEETING OF SHAREHOLDERS.
DO NOT SEND STOCK CERTIFICATES WITH THE PROXY CARD. UNDER SEPARATE COVER, YOU
WILL RECEIVE INSTRUCTIONS FOR DELIVERING YOUR STOCK CERTIFICATES.
[THE FARWELL STATE SAVINGS BANK LOGO]
DEAR SHAREHOLDER OF THE FARWELL STATE SAVINGS BANK:
You are cordially invited to attend a special meeting of shareholders of
The Farwell State Savings Bank, to be held on _______________, 2006, at _____
a.m., local time, at the ______________________________, Michigan. At this
special meeting, you will be asked to approve the acquisition of The Farwell
State Savings Bank by Farmers State Bank of Breckenridge, a wholly-owned
subsidiary of IBT Bancorp, Inc. The acquisition will be accomplished through the
merger of The Farwell State Savings Bank with and into Farmers State Bank of
Breckenridge.
If the merger is completed as proposed, subject to certain possible
adjustments, each share of The Farwell State Savings Bank common stock will be
converted into the right to receive 3.0382 shares of IBT Bancorp, Inc. common
stock and $29.00 in cash. Cash will be paid in lieu of any fractional share of
IBT Bancorp, Inc. common stock.
The last transaction price in IBT Bancorp, Inc. common stock known to
management occurring prior to the public announcement of the merger was $38.18 a
share on December 15, 2005, making 3.0382 shares of IBT Bancorp, Inc. common
stock and $29.00 in cash on that date equal to $145.00. The last transaction
price in IBT Bancorp, Inc. common stock known to management occurring prior to
the mailing of this Proxy Statement-Prospectus was $__________ a share on
_______________, 2006, making 3.0382 shares of IBT Bancorp, Inc. common stock
and $29.00 in cash equal on that date to $__________.
YOUR VOTE IS VERY IMPORTANT. The parties cannot complete the merger unless,
among other things, our shareholders approve the merger. THE FARWELL STATE
SAVINGS BANK BOARD OF DIRECTORS HAS APPROVED THE MERGER AND RECOMMENDS THAT YOU
VOTE "FOR" APPROVAL OF THE MERGER. Please review and consider this Proxy
Statement-Prospectus carefully.
It is important that your shares are represented at the meeting, whether or
not you plan to attend. An abstention or failure to vote will have the same
effect as a vote against the merger. Accordingly, please complete, date, sign,
and return promptly your proxy card in the enclosed envelope. You may attend the
meeting and vote your shares in person if you wish, even if you have previously
returned your proxy.
Sincerely,
----------------------------------------
Thomas E. Kedrowski
President and Chief Executive Officer of
The Farwell State Savings Bank
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED IN
CONNECTION WITH THE MERGER OR DETERMINED IF THIS DOCUMENT IS ACCURATE OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES TO BE ISSUED IN CONNECTION WITH THE MERGER ARE NOT SAVINGS
ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK OR SAVINGS ASSOCIATION AND
ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENTAL AGENCY. IBT BANCORP, INC. COMMON STOCK IS SUBJECT TO INVESTMENT
RISKS, INCLUDING POSSIBLE LOSS OF VALUE.
THIS DOCUMENT IS DATED _______________, 2006
AND IS FIRST BEING MAILED ON OR ABOUT _______________, 2006.
TABLE OF CONTENTS
PAGE
----
QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL MEETING OF
SHAREHOLDERS............................................................. 1
SUMMARY.................................................................. 3
SELECTED HISTORICAL FINANCIAL DATA FOR IBT AND FARWELL (UNAUDITED)....... 6
PRO FORMA MERGER DATA (UNAUDITED)........................................ 8
CAPITAL RATIOS........................................................... 9
COMPARATIVE PER SHARE DATA (UNAUDITED)................................... 9
RISK FACTORS............................................................. 10
THE FARWELL SPECIAL MEETING.............................................. 11
THE MERGER AND THE MERGER AGREEMENT...................................... 13
COMPARISON OF SHAREHOLDERS' RIGHTS....................................... 30
DESCRIPTION OF CAPITAL STOCK OF IBT...................................... 33
CERTAIN PROVISIONS OF THE IBT ARTICLES OF INCORPORATION AND BYLAWS....... 33
EXPERTS.................................................................. 34
LEGAL OPINIONS........................................................... 34
ADJOURNMENT OF THE SPECIAL MEETING....................................... 34
CERTAIN BENEFICIAL OWNERS OF FARWELL COMMON STOCK........................ 35
UNAUDITED PRO FORMA FINANCIAL INFORMATION................................ 35
FARWELL'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................. 41
CERTAIN BENEFICIAL OWNERS OF IBT COMMON STOCK............................ 76
OTHER MATTERS............................................................ 76
WHERE YOU CAN FIND MORE INFORMATION...................................... 76
FORWARD-LOOKING STATEMENTS............................................... 77
APPENDICES
A. Amended and Restated Agreement and Plan of Merger by and between
Farmers State Bank of Breckenridge, The Farwell State Savings Bank
and IBT Bancorp, Inc. dated May 2, 2006............................... A
B. Opinion of Austin Associates, LLC..................................... B
C. Opinion of Donnelly Penman & Partners................................. C
D. Section 3706(2)(b) of the Michigan Banking Code of 1999............... D
This proxy statement-prospectus incorporates business and financial information
about IBT Bancorp, Inc. ("IBT") that is not included in or delivered with this
proxy statement-prospectus. Documents incorporated by reference are available
from IBT without charge. You may obtain documents incorporated by reference in
this proxy statement-prospectus by requesting them in writing or by telephone
from IBT at the following address:
IBT Bancorp, Inc.
Attn: Dennis P. Angner
President & Chief Executive Officer
200 East Broadway
Mt. Pleasant, Michigan 48858
(989) 772-9471
TO OBTAIN DELIVERY OF THIS INFORMATION PRIOR TO THE SPECIAL SHAREHOLDERS MEETING
OF THE FARWELL STATE SAVINGS BANK ("FARWELL"), YOU MUST REQUEST THE INFORMATION
NO LATER THAN _______________, 2006, WHICH IS FIVE BUSINESS DAYS BEFORE THE DATE
OF THE SPECIAL MEETING AT WHICH YOU ARE REQUESTED TO VOTE. You should rely only
on the information contained or incorporated by reference in this proxy
statement-prospectus to vote on the merger and the related issuance of IBT
common stock. Neither IBT nor Farwell has authorized anyone to provide you with
information that is different from what is contained in this proxy
statement-prospectus.
QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE
SPECIAL MEETING OF SHAREHOLDERS
Q: WHAT IS THE PROPOSED TRANSACTION?
A: Pursuant to the Amended and Restated Agreement and Plan of Merger (the
"Merger Agreement") (attached as Appendix A to this proxy statement-prospectus),
Farmers State Bank of Breckenridge ("Farmers") will acquire Farwell through a
merger transaction in which Farwell will merge with and into Farmers. At the
effective time of the merger, Farmers will change its name to FSB Bank ("FSB").
FSB will continue to be a wholly-owned subsidiary of IBT.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO ME?
A: Generally speaking, because you will receive a combination of IBT common
stock and cash, you should recognize a capital gain, but not loss, on the
exchange to the extent of the lesser of cash received or gain realized in the
exchange. This tax treatment may not apply to all Farwell shareholders. Farwell
shareholders should consult their own tax advisors for a full understanding of
the tax consequences of the merger. Farwell recommends that Farwell shareholders
carefully read the complete explanation of the "Material Federal Income Tax
Consequences" of the merger beginning on page _____.
Q: WHAT DO I NEED TO DO NOW?
A: After you have carefully read this document, indicate on your proxy card how
you want your shares to be voted. Then sign and mail your proxy card in the
enclosed prepaid return envelope as soon as possible. This will enable your
shares to be represented and voted at the special meeting.
Q: WHY IS MY VOTE IMPORTANT?
A: The Merger Agreement must be adopted by 66 2/3% of the shares of Farwell
issued and outstanding as of the record date for the special meeting
(_______________, 2006). A failure to vote will have the same effect as a vote
against the Merger Agreement.
Q: IF MY BROKER HOLDS MY SHARES IN "STREET NAME" WILL MY BROKER AUTOMATICALLY
VOTE MY SHARES FOR ME?
A: No. Your broker will not be able to vote your shares without instructions
from you. You should instruct your broker to vote your shares, following the
directions your broker provides.
Q: WHAT IF I FAIL TO INSTRUCT MY BROKER TO VOTE MY SHARES?
A: If you fail to instruct your broker to vote your shares, the broker will
submit an unvoted proxy (a broker non-vote) as to your shares. Broker non-votes
will count toward a quorum at the special meeting. However, broker non-votes
will not count as a vote with respect to the Merger Agreement, and therefore
will have the same effect as a vote against the Merger Agreement.
Q: CAN I ATTEND THE SPECIAL MEETING AND VOTE MY SHARES IN PERSON?
A: Yes. All shareholders are invited to attend the special meeting. Shareholders
of record can vote in person at the special meeting by executing a proxy card.
If a broker holds your shares in street name, then you are not the shareholder
of record and you must ask your broker how you can vote your shares at the
special meeting.
Q: CAN I CHANGE MY VOTE?
A: Yes. If you have not voted through your broker, you can change your vote
after you have sent in your proxy card by:
- providing written notice to the Secretary of Farwell;
- submitting a new proxy card. Any earlier proxies will be revoked
automatically; or
- attending the special meeting and voting in person. Any earlier proxy will
be revoked. However, simply attending the special meeting without voting
will not revoke your proxy.
1
If you have instructed a broker to vote your shares, you must follow your
broker's directions to change your vote.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: PLEASE DO NOT send your stock certificates with your proxy card. You will be
sent a letter of transmittal to complete and return with your Farwell common
stock certificate after the completion of the merger.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: Farmers and Farwell currently expect to complete the merger in the third
quarter of 2006, assuming all of the conditions to completion of the merger have
been satisfied.
Q: WHAT WILL SHAREHOLDERS OF FARWELL RECEIVE IN THE MERGER?
A: If the Merger Agreement is approved and the merger is subsequently completed,
each outstanding share of Farwell common stock (other than any dissenting
shares) will be converted into the right to receive 3.0382 shares of IBT common
stock and $29.00 in cash subject to adjustment under certain circumstances. Cash
will be paid in lieu of any fractional share of IBT common stock.
Q: WHOM SHOULD I CALL WITH QUESTIONS?
A: You should direct any questions regarding the special meeting of shareholders
or the merger to Thomas E. Kedrowski, President and Chief Executive Officer of
Farwell at (989) 588-9945.
2
SUMMARY
This summary highlights selected information included in this document and does
not contain all of the information that may be important to you. You should read
this entire document and its appendices and the other documents to which we
refer you before you decide how to vote with respect to the Merger Agreement.
You may obtain the information incorporated by reference into this document
without charge by following the instructions in the section entitled "Where You
Can Find More Information" on page _____. Each item in this summary includes a
page reference directing you to a more complete description of that item.
This document, including information included or incorporated by reference in
this document, contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements include, but are not limited to: (i) statements of goals, intentions
and expectations; (ii) statements regarding business plans, prospects, growth
and operating strategies; (iii) statements regarding the asset quality of loan
and investment portfolios; (iv) statements regarding estimates of risks and
future costs and benefits; and (v) other statements identified by words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates,"
or words of similar meaning. These forward-looking statements are based on
current beliefs and expectations of the management of IBT, Farmers and Farwell
and are inherently subject to significant business, economic and competitive
uncertainties and contingencies, many of which are beyond our control. In
addition, these forward-looking statements are subject to assumptions with
respect to future business strategies and decisions that are subject to change.
Actual results may differ materially from the anticipated results discussed in
these forward-looking statements. See "Forward-Looking Statements" on page
_____.
THE MERGER
THE MERGER AGREEMENT IS ATTACHED TO THIS DOCUMENT AS APPENDIX A. WE ENCOURAGE
YOU TO READ THIS AGREEMENT CAREFULLY, AS IT IS THE LEGAL DOCUMENT THAT GOVERNS
THE MERGER OF FARWELL WITH AND INTO FARMERS.
PARTIES TO THE MERGER
FARMERS (PAGE ___)
Farmers, a Michigan chartered commercial bank, is headquartered in Breckenridge,
Michigan, and operates three offices. As of March 31, 2006, Farmers had assets
of $136.4 million, deposits of $111.7 million and shareholders equity of $13.0
million. Farmers' principal executive office is located at 316 East Saginaw
Street, Breckenridge, Michigan, 48615, and the telephone number is (989)
842-3191.
FARWELL (PAGE _____)
Farwell, a Michigan chartered commercial bank, is headquartered in Farwell,
Michigan, and operates 2 offices. As of March 31, 2006, Farwell had assets of
$91.6 million, deposits of $76.8 million and shareholders' equity of $13.7
million. Farwell's principal executive office is located at 399 West Main
Street, Farwell, Michigan, 48622, and the telephone number is (989) 588-9945.
IBT (PAGE _____)
IBT, headquartered in Mt. Pleasant, Michigan, is the holding company for Farmers
and Isabella Bank and Trust, which operate 20 full service offices and IBT Title
and Insurance Agency which operates five offices. As of March 31, 2006, IBT had
consolidated assets of $761.7 million, deposits of $616.7 million and
shareholders' equity of $81.8 million.
The principal executive office of IBT is located at 200 East Broadway, Mt.
Pleasant, Michigan, 48858, and the telephone number is (989) 772-9471.
WHAT FARWELL SHAREHOLDERS WILL RECEIVE IN THE MERGER (PAGE _____)
If the Merger Agreement is approved and the merger is subsequently completed,
each outstanding share of Farwell common stock (other than dissenting shares)
will be converted into the right to receive 3.0382 shares of IBT common stock
and $29.00 in cash, subject to adjustment under certain circumstances. Cash will
be paid in lieu of any fractional share of IBT common stock.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER (PAGE
_____)
As a result of receiving a combination of IBT common stock and cash in exchange
for shares of Farwell common stock, you will likely recognize gain, but not
loss, equal to the lesser of (1) the amount of cash received or (2) the amount
of gain realized in the transaction.
3
Generally, the actual U.S. federal income tax consequences to you will depend on
whether your shares of Farwell common stock were purchased at different times
and at different prices and the character of the gain, if any, as either capital
gain or ordinary income.
You should read "Material United States Federal Income Tax Consequences of the
Merger" starting on page _____ for a more complete discussion of the federal
income tax consequences of the merger. Tax matters can be complicated and the
tax consequences of the merger to you will depend on your particular tax
situation. You should consult your own tax advisor to fully understand the tax
consequences of the merger to you.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS SHAREHOLDER APPROVAL OF THE
MERGER (PAGE _____)
The Board of Directors of Farwell believes that the merger presents an
opportunity to join a financial institution that will have greater financial
strength and earning power than Farwell would have on its own, as well as the
added scale necessary to undertake and solidify leadership positions.
As a result, the Board of Directors of Farwell unanimously approved the Merger
Agreement. The Board of Directors of Farwell believes that the merger and the
Merger Agreement are fair to and in the best interests of Farwell and its
shareholders and unanimously recommends that you vote "FOR" adoption of the
Merger Agreement.
OPINIONS OF FINANCIAL ADVISORS (PAGE _____ AND APPENDIX B AND C)
In connection with the merger, the Board of Directors of Farwell, Farmers and
IBT received the written opinion of Austin Associates, LLC, that the terms of
the merger are fair to IBT's and Farwell's shareholders from a financial point
of view. In addition, Donnelly Penman & Partners has given its written opinion
to Farwell's Board of Directors that the consideration to be received in the
merger by Farwell shareholders is fair from a financial point of view. The full
texts of the opinion of Austin Associates, LLC, dated _______________, 2006 and
the opinion of Donnelly Penman & Partners dated _______________, 2006 are
included in this document as Appendix B and C, respectively. Farwell encourages
you to read these opinions carefully in their entirety for a description of the
procedures followed, assumptions made, matters considered and limitations of the
review undertaken by Austin Associates, LLC and Donnelly Penman & Partners. The
opinions do not constitute a recommendation to you or any other shareholder as
to how to vote with respect to the merger, or any other matter relating to the
proposed transaction. Austin Associates, LLC and Donnelly Penman & Partners will
each receive a fee for rendering their respective fairness opinions in
connection with the merger.
SPECIAL MEETING OF SHAREHOLDERS OF FARWELL (PAGE _____)
Farwell will hold a special meeting of its shareholders on _______________, 2006
at ___:00 __.m., Michigan time, at ______________________________, Michigan. At
the special meeting of shareholders, you will be asked to vote to adopt the
Merger Agreement.
You may vote at the special meeting of shareholders if you owned shares of
Farwell common stock at the close of business on the record date,
_______________, 2006. On that date, there were __________ shares of Farwell
common stock outstanding and entitled to vote at the special meeting of
shareholders. You may cast one vote for each share of Farwell common stock you
owned on the record date.
Even if you expect to attend the special meeting of shareholders, Farwell
recommends that you promptly complete and return your proxy card in the enclosed
return envelope.
SHAREHOLDER VOTE REQUIRED (PAGE _____)
Adoption of the Merger Agreement requires the affirmative vote of the holders of
66 2/3% of the shares of Farwell common stock issued and outstanding on the
record date. A failure to vote or an abstention will have the same effect as a
vote against the merger. As of the record date, directors and executive officers
of Farwell beneficially owned 75,485 shares of Farwell common stock entitled to
vote at the special meeting of shareholders. This represents approximately 28.8%
of the total votes entitled to be cast at the special meeting of shareholders.
These individuals have indicated that they will vote "FOR" adoption of the
Merger Agreement.
DISSENTERS' RIGHTS OF APPRAISAL (PAGE _____ AND APPENDIX D)
Under Section 3706(2)(b) of the Michigan Banking Code of 1999, holders of
Farwell common stock have the right to obtain an appraisal of the value of their
shares of Farwell common stock in connection with the merger. To perfect
appraisal rights, a Farwell shareholder must not vote for the adoption of the
Merger Agreement and must strictly comply with all of the procedures required
under Section 3706(2)(b) of the Michigan Banking Code of 1999.
4
We have included a copy of Section 3706(2)(b) of the Michigan Banking Code of
1999 relating to dissenters' rights as Appendix D to this document.
INTERESTS OF FARWELL'S DIRECTORS AND OFFICERS IN THE MERGER (PAGE _____)
In considering the recommendation of the Board of Directors of Farwell to
approve the merger, you should be aware that certain executive officers and
directors of Farwell have employment and other compensation agreements or plans
and continuing liability insurance and indemnification protections that give
them interests in the merger that are somewhat different from, or in addition
to, the interests of Farwell shareholders.
REGULATORY APPROVALS REQUIRED FOR THE MERGER (PAGE _____)
We cannot complete the merger without the prior approval or non-objection of the
Federal Deposit Insurance Corporation and the Michigan Office of Financial and
Insurance Services. Farmers is in the process of seeking these approvals and
non-objections. While we do not know of any reason why Farmers would not be able
to obtain the necessary approvals in a timely manner, we cannot assure you that
these approvals and non-objections will occur or what the timing may be or that
these approvals and non-objections will not be subject to one or more conditions
that affect the advisability of the merger.
CONDITIONS TO THE MERGER (PAGE _____)
Completion of the merger depends on a number of conditions being satisfied or
waived, including but not limited to the following:
- the Farwell shareholders must have adopted the Merger Agreement;
- the Federal Deposit Insurance Corporation and the Michigan Office of
Financial and Insurance Services must have approved or not objected to the
merger, as appropriate, and all statutory waiting periods must have
expired;
- no stop order suspending the effectiveness of IBT's registration statement
of which this document is a part shall have been issued and no proceedings
for that purpose shall have been initiated or threatened by the Securities
and Exchange Commission; and
- the holders of no more than 10% of Farwell's shares of common stock have
indicated their intention to seek dissenter's rights of appraisal.
Other conditions to the completion of the merger are described beginning on page
_____. We cannot be certain when, or if, the conditions to the merger will be
satisfied or waived or whether or not the merger will be completed.
NO SOLICITATION (PAGE _____)
Farwell has agreed, subject to certain limited exceptions, not to initiate
discussions with another party regarding a business combination with such other
party while the merger with Farmers is pending.
TERMINATION OF THE MERGER AGREEMENT (PAGE _____)
Farmers and Farwell may mutually agree at any time to terminate the Merger
Agreement without completing the merger, even if Farwell shareholders have
approved it. Also, either party may decide, without the consent of the other
party, to terminate the Merger Agreement under specified circumstances, if the
required regulatory approvals are not received or if the other party breaches
its agreements.
DIFFERENCES IN RIGHTS OF SHAREHOLDERS (PAGE _____)
The rights of Farwell shareholders after the merger who continue as IBT
shareholders will be governed by Michigan corporate law and the articles of
incorporation and bylaws of IBT rather than the articles of incorporation and
bylaws of Farwell, which are governed by Michigan banking law.
5
SELECTED HISTORICAL FINANCIAL DATA FOR
IBT AND FARWELL (UNAUDITED)
The following tables show summarized historical consolidated financial data for
IBT and Farwell. This information is derived from IBT's audited financial
statements for 2001 through 2005 and unaudited financial statements for the
three-month period ended March 31, 2006 and Farwell's audited financial
statements for 2005 and unaudited financial statements for 2001 through 2004 and
for the three-month period ended March 31, 2006. This information is only a
summary. You should read it in conjunction with the historical financial
statements (and related notes) contained or incorporated by reference in IBT's
annual reports on Form 10-K, quarterly reports on Form 10-Q, and other
information filed with the Securities and Exchange Commission ("SEC") and in
Farwell's financial statements, related notes, Management's Discussion and
Analysis of Financial Condition and Results of Operations and other information
included in this proxy statement-prospectus. See "Where You Can Find More
Information" on page _____.
6
SUMMARY OF SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
IBT BANCORP, INC.
Year Ended December 31,
March 31 --------------------------------------------------------------
2006 2005 2004 2003 2002 2001
---------- ---------- ---------- ---------- ---------- ----------
INCOME STATEMENT DATA
Net interest income $ 5,906 $ 23,909 $ 23,364 $ 23,528 $ 22,905 $ 21,538
Provision for loan losses 167 777 735 1,455 1,025 770
Net income 1,214 6,776 6,645 7,205 6,925 6,066
BALANCE SHEET DATA (period end)
Assets $ 761,749 $ 741,654 $ 678,034 $ 664,079 $ 652,717 $ 592,143
Deposits 616,716 592,478 563,876 567,707 561,456 516,241
Loans (gross) 484,897 483,242 452,895 421,859 391,088 397,864
Borrowings 44,242 52,165 30,982 18,053 17,793 11,632
Shareholders' equity 81,818 80,902 72,594 68,936 63,457 56,828
Common Share Summary (1)
Net income $ 0.22 $ 1.25 $ 1.24 $ 1.36 $ 1.33 $ 1.17
Cash dividends 0.11 0.60 0.57 0.55 0.50 0.45
Book value 14.92 14.78 13.48 12.94 12.09 10.99
Weighted average shares outstanding
IBT 5,464,420 5,416,961 5,344,585 5,270,085 5,193,885 5,162,071
(1) all per share data was adjusted for stock dividends
FARWELL STATE SAVINGS BANK
Year Ended December 31,
March 31 ----------------------------------------------------
2006 2005 2004 2003 2002 2001
-------- -------- -------- -------- -------- --------
INCOME STATEMENT DATA
Net interest income $ 829 $ 3,462 $ 3,646 $ 3,707 $ 3,583 $ 3,404
Provision for loan losses -- -- 16 48 42 48
Net income 355 1,547 1,642 1,753 1,668 1,537
BALANCE SHEET DATA (period end)
Assets $ 91,550 $ 89,142 $ 89,051 $ 91,825 $ 90,524 $ 85,692
Deposits 76,819 64,290 64,704 61,930 59,277 57,863
Loans (gross) 64,011 64,246 64,704 61,930 59,277 57,863
Borrowing -- -- -- -- --
Shareholders' equity 13,731 13,555 14,999 17,034 16,358 15,517
Common Share Summary
Net income $ 1.22 $ 5.89 $ 6.26 $ 6.68 $ 6.35 $ 5.86
Cash dividends 0.50 11.00 13.25 3.25 3.25 3.25
Book value 52.31 51.64 57.14 64.90 62.32 59.11
Weighted average shares outstanding
FSSB 262,500 262,500 262,500 262,500 262,500 262,500
7
PRO FORMA MERGER DATA (UNAUDITED)
The following table shows selected financial information of IBT on a pro forma
combined basis giving effect to the merger as if the merger had become effective
at the end of the period presented, in the case of balance sheet information,
and at the beginning of the period presented, in the case of income statement
information. The pro forma information reflects the purchase method of
accounting under accounting principles generally accepted in the United States
of America. These adjustments are preliminary and are subject to change. The
final adjustments will be calculated when the merger is effective and may be
materially different from those presented.
The unaudited pro forma financial information is provided for informational
purposes only. The pro forma financial information presented is not necessarily
indicative of the actual results that would have been achieved by IBT had the
merger been consummated on the dates or at the beginning of the periods
presented, and is not necessarily indicative of future results.
You should read this summary pro forma information in conjunction with the
information under "Unaudited Pro Forma Financial Information" beginning on page
_____.
QUARTER ENDED YEAR ENDED
MARCH 31, 2006 DECEMBER 31, 2005
-------------- -----------------
(dollars in thousands)
PRO FORMA COMBINED INCOME STATEMENT DATA:
Net interest income $ 6,632 $ 26,960
Provision for loan losses 167 777
Net income 1,437 7,936
PRO FORMA COMBINED BALANCE SHEET DATA (PERIOD END)(1)
Assets $876,432 $854,105
Loans (net of allowance for loan losses) 540,087 538,715
Deposits 692,304 665,656
Borrowings 51,855 59,778
Shareholders' equity 112,269 111,353
----------
(1) The pro forma combined balance sheet data assumes the issuance of 797,528
shares of IBT common stock, plus the payment of $7,612,500 in cash, in
exchange for all of the outstanding shares of Farwell common stock. This
assumes an exchange ratio of 3.0382 shares of IBT common stock and $29.00
in cash for each share of Farwell common stock outstanding as of [Record
Date], 2006. The aggregate merger consideration to be paid by Farmers to
all Farwell shareholders is subject to certain possible adjustments
pursuant to the Merger Agreement.
8
CAPITAL RATIOS
Under the "risk-based" capital guidelines presently in effect for banks and bank
holding companies, minimum capital levels are based on the perceived risk in the
various asset categories. Certain off-balance-sheet instruments, such as loan
commitments and letters of credit, require capital allocations. Bank holding
companies such as IBT and banks such as Farwell are required to maintain minimum
risk-based capital ratios. IBT's and Farwell's ratios are above the regulatory
minimum guidelines, Farwell met the regulatory criteria to be categorized as a
"well-capitalized" institution as of December 31, 2005. The "well-capitalized"
classification may permit banks to minimize the cost of FDIC insurance
assessments by being charged a lesser rate than those that do not meet this
definition. Designation as a "well-capitalized" institution does not constitute
a recommendation by federal bank regulators. The following table shows capital
ratios and requirements as of March 31, 2006
RISK-BASED CAPITAL
-------------------------------
LEVERAGE % TIER 1 % TOTAL %
---------- -------- -------
IBT's capital ratios 10.8 15.9 17.2
Farwell's capital ratios 15.4 29.0 30.2
Pro forma combined capital ratios - Consolidated IBT Bancorp 11.3 17.0 18.3
Regulatory capital ratios - "well-capitalized" definition 5.00 6.00 10.00
Regulatory capital ratios - minimum requirement 4.00 4.00 8.00
COMPARATIVE PER SHARE DATA (UNAUDITED)
The following table shows pro forma information about earnings per share,
dividends per share, and book value per share.
IBT anticipates that the combined company will derive financial benefits from
the merger that include reduced operating expenses and the opportunity to earn
more revenue. The pro forma information, while helpful in illustrating the
financial characteristics of the combined entities under one set of assumptions,
does not reflect these benefits and, accordingly, does not attempt to credit or
suggest future results. The pro forma information also does not necessarily
reflect what the historical results of the combined entities would have been had
the companies actually been combined during these periods.
The pro forma information in the following table is based on, and should be read
together with, the historical financial information that is presented in this
document and in IBT's prior filings with the SEC and with the condensed combined
pro forma financial statements presented elsewhere in this document. See "Where
You Can Find More Information" on page _____.
EQUIVALENT PRO
IBT FARWELL PRO FORMA FORMA PER SHARE
HISTORICAL HISTORICAL COMBINED OF FARWELL
---------- ---------- --------- ---------------
Comparative Per Share Data (1) (4)
BASIC EARNINGS
Year ended December 31, 2005 $ 1.25 $ 5.89 $ 1.28 $ 1.47
Quarter ended March 31, 2006 0.22 1.22 0.23 0.32
DILUTED EARNINGS
Year ended December 31, 2005 $ 1.25 $ 5.89 $ 1.28 $ 1.47
Quarter ended March 31, 2006 0.22 1.22 0.22 0.32
CASH DIVIDENDS PAID
Year ended December 31, 2005 $ 0.60 $11.00 $ 0.60 $ 0.60(2)
Quarter ended March 31, 2006 0.11 0.50 0.11 0.11(2)
TANGIBLE BOOK VALUE (3)
December 31, 2005 $14.78 51.64 $17.92 $38.18
March 31, 2006 14.92 52.31 17.89 38.18
(1) The Pro Forma Combined earnings per share amounts were calculated by
totaling the historical earnings of IBT and Farwell and dividing the
resulting amount by the average pro forma shares of IBT and Farwell giving
effect to the merger as if it had occurred as of the beginning of the
periods presented. The average pro forma shares of IBT and Farwell reflect
historical basic and diluted shares, plus historical basic and diluted
average shares of Farwell, as adjusted based on an assumed exchange ratio
of 3.0382 shares of IBT common stock, plus the payment of $29.00 in cash,
for each share of Farwell common stock. The aggregate merger consideration
to be paid by Farmers is subject to certain adjustments pursuant to the
Merger Agreement. The pro forma earnings amounts do not take into
consideration any operating efficiencies that may be realized as a result
of the merger.
(2) Pro Forma Combined cash dividends paid represents IBT's historical amount
only.
9
(3) The Pro Forma Combined tangible book value data gives effect to the merger
as if it had occurred on March 31, 2006 and December 31, 2005.
(4) The Equivalent Pro Forma Per Share of Farwell amounts were calculated by
multiplying the Pro Forma Combined amounts by the assumed exchange ratio of
3.0382 shares of IBT common stock for each share of Farwell common stock.
These amounts do not take into consideration any operating efficiencies
that may be realized as a result of the merger. This data is presented for
comparative purposes only.
RISK FACTORS
In addition to the other information contained in or incorporated by reference
into this proxy statement-prospectus, including the matters addressed under the
caption "Forward-Looking Statements," on page _____ you should carefully
consider the following risk factors in deciding whether to vote for adoption of
the Merger Agreement.
RISKS RELATED TO THE MERGER
IBT MAY FAIL TO REALIZE THE ANTICIPATED BENEFITS OF THE MERGER.
The success of the merger will depend on, among other things, IBT's ability to
realize anticipated cost savings, to conduct the business of Farwell in a manner
that does not materially disrupt the existing customer relationships of Farwell
nor result in decreased revenues resulting from any loss of customers, and
permits growth opportunities to occur. Farwell represents a new market area for
IBT. If IBT is not able to successfully achieve these objectives, the
anticipated benefits of the merger may not be fully realized, realized at all or
may take longer to realize than expected.
Farmers and Farwell have operated and, until the completion of the merger, will
continue to operate, independently. It is possible that the integration process
could result in the loss of key employees, the disruption of Farwell's ongoing
business or inconsistencies in standards, controls, procedures and policies that
adversely affect the ability of IBT to maintain relationships with customers and
employees or to achieve the anticipated benefits of the merger.
FARWELL DIRECTORS AND OFFICERS HAVE INTERESTS IN THE MERGER THAT DIFFER FROM
THOSE OF A SHAREHOLDER.
Farwell's directors and officers have various interests in the merger that
differ from, or are in addition to, the interests of Farwell shareholders. These
interests include:
- the agreement by Farmers to employ Mr. Kedrowski pursuant to a two-year
written employment agreement.
- following completion of the merger, the Farwell officers will continue to
serve with Farmers and the Farwell directors will serve on a regional
advisory board for the Farwell division of Farmers and shall receive the
same board member compensation as provided by Farwell prior to the merger.
- upon completion of the merger, Michael McGuire shall join the reconstituted
Farmers' Board of Directors.
- the agreement by Farmers to employ all current Farwell employees pursuant
to a five-year written employment agreement.
- the agreement by Farmers to provide liability insurance and indemnification
protection to Farwell directors and officers.
RISKS ABOUT IBT
IBT'S CURRENT CONCENTRATION OF LOANS IN ITS PRIMARY MARKET AREA MAY INCREASE ITS
RISK.
IBT's success depends primarily on the general economic conditions in
Mid-Michigan. Unlike larger banks that are more geographically diversified, IBT
provides banking and financial services to customers primarily in Mid-Michigan.
The local economic conditions in the Mid-Michigan area have a significant impact
on its loans, the ability of the borrowers to repay these loans and the value of
the collateral securing these loans. A significant decline in general economic
conditions caused by inflation, recession, unemployment or other factors beyond
IBT's control would impact these local economic conditions and could negatively
affect the financial results of its banking operations.
IBT targets its business lending and marketing strategy for loans to serve
primarily the banking and financial services needs of small to medium size
businesses. These small to medium size businesses generally have fewer financial
resources in terms of capital or borrowing capacity than larger entities. If
general economic conditions negatively impact these businesses, IBT's results of
operations and financial condition may be adversely affected.
10
CHANGES IN INTEREST RATES COULD ADVERSELY AFFECT IBT'S RESULTS OF OPERATIONS AND
FINANCIAL CONDITION.
IBT's results of operations and financial condition are significantly affected
by changes in interest rates. IBT's results of operations depend substantially
on its net interest income, which is the difference between the interest income
earned on its interest-earning assets and the interest expense paid on its
interest-bearing liabilities. At December 31, 2005, IBT's interest rate risk
profile indicated that net interest income would increase in a rising long term
interest rate environment, but would decrease in a declining long term interest
rate environment.
Changes in interest rates also affect the value of IBT's interest-earning
assets, and in particular IBT's securities portfolio. Generally, the value of
securities fluctuates inversely with changes in interest rates. At December 31,
2005, IBT's available for sale securities totaled $183 million. Decreases in the
fair value of securities available for sale could have an adverse effect on
shareholders' equity or earnings.
IBT also is subject to reinvestment risk associated with changes in interest
rates. Changes in interest rates may affect the average life of loans and
mortgage-related securities. Decreases in interest rates can result in increased
prepayments of loans and mortgage-related securities, as borrowers refinance to
reduce borrowing costs. Under these circumstances, IBT is subject to
reinvestment risk to the extent that it is unable to reinvest the cash received
from such prepayments at rates that are comparable to the rates on existing
loans and securities. Additionally, increases in interest rates may decrease
loan demand and make it more difficult for borrowers to repay adjustable rate
loans.
STRONG COMPETITION WITHIN IBT'S MARKET AREA MAY LIMIT ITS GROWTH AND
PROFITABILITY.
Competition in the banking and financial services industry is intense. In IBT's
market area, IBT competes with commercial banks, savings institutions, mortgage
brokerage firms, credit unions, finance companies, mutual funds, insurance
companies, and brokerage and investment banking firms operating locally and
elsewhere. Many of these competitors (whether regional or national institutions)
have substantially greater resources and lending limits than IBT does and may
offer certain services that IBT does not or cannot provide. IBT's profitability
depends upon its continued ability to successfully compete in its market area.
IBT OPERATES IN A HIGHLY REGULATED ENVIRONMENT AND MAY BE ADVERSELY AFFECTED BY
CHANGES IN LAWS AND REGULATIONS.
IBT is subject to regulation, supervision and examination by the Board of
Governors of the Federal Reserve. Isabella Bank and Trust and Farmers State Bank
of Breckenridge are subject to regulation by the Office of Financial and
Insurance Services of the State of Michigan and by the Federal Deposit Insurance
Corporation, as insurer of their deposits. Such regulation and supervision
govern the activities in which a bank and its holding company may engage and are
intended primarily for the protection of the deposit insurance funds and
depositors. These regulatory authorities have extensive discretion in connection
with their supervisory and enforcement activities, including the imposition of
restrictions on the operation of a bank, the classification of assets by a bank
and the adequacy of a bank's allowance for loan losses. Any change in such
regulation and oversight, whether in the form of regulatory policy, regulations,
or legislation, could have a material impact on IBT and its operations.
IBT's operations are also subject to extensive regulation by other federal,
state and local governmental authorities and are subject to various laws and
judicial and administrative decisions imposing requirements and restrictions on
part or all of its operations. IBT believes that it is in substantial compliance
in all material respects with applicable federal, state and local laws, rules
and regulations. Because its business is highly regulated, the laws, rules and
regulations applicable to IBT are subject to regular modification and change.
There are currently proposed various laws, rules and regulations that, if
adopted, would impact its operations, including, among other things, matters
pertaining to corporate governance and SEC rules pertaining to public reporting
disclosures. There can be no assurance that these proposed laws, rules and
regulations, or any other laws, rules or regulations, will not be adopted in the
future, which could make compliance more difficult or expensive or otherwise
adversely affect its business, financial condition or prospects.
THE FARWELL SPECIAL MEETING
Farwell is mailing this proxy statement-prospectus to you as a Farwell
shareholder on or about _______________, 2006. With this document, Farwell is
sending you a notice of the Farwell special meeting of shareholders and a form
of proxy that is solicited by Farwell's Board of Directors. The special meeting
will be held on _______________, 2006 at ___:00 _.m., local time, at
________________________________________, Michigan.
MATTERS TO BE CONSIDERED
The sole purpose of the special meeting of shareholders is to vote on the
adoption of the Merger Agreement by which Farwell will merge with and into
Farmers.
11
You may also be asked to vote upon a proposal to adjourn or postpone the special
meeting of shareholders. Farwell could use any adjournment or postponement for
the purpose, among others, of allowing additional time to solicit proxies.
PROXY CARD, REVOCATION OF PROXY
You should complete and return the proxy card accompanying this document to
ensure that your vote is counted at the special meeting of shareholders,
regardless of whether you plan to attend. You can revoke your proxy at any time
before the vote is taken at the special meeting by:
- submitting written notice of revocation to the Secretary of Farwell;
- submitting a properly executed proxy bearing a later date before the
special meeting of shareholders; or
- voting in person at the special meeting of shareholders. However, simply
attending the special meeting without voting will not revoke an earlier
proxy.
If your shares are held in street name, you should follow the instructions of
your broker regarding revocation of proxies.
All shares represented by valid proxies, and not revoked, will be voted in
accordance with your instructions on the proxy card. If you sign your proxy
card, but make no specification on the card as to how you want your shares
voted, your proxy card will be voted "FOR" approval of the foregoing proposal.
The Board of Directors is presently unaware of any other matter that may be
presented for action at the special meeting of shareholders. If any other matter
does properly come before the special meeting, the Board of Directors intends
that shares represented by properly submitted proxies will be voted, or not
voted, by and at the discretion of the persons named as proxies on the proxy
card.
RECORD DATE
The close of business on _______________, 2006 has been fixed as the record date
for determining the Farwell shareholders entitled to receive notice of and to
vote at the special meeting of shareholders. At that time, __________ shares of
Farwell common stock were outstanding, and were held by approximately __________
holders of record.
VOTING RIGHTS, QUORUM REQUIREMENTS AND VOTE REQUIRED
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of Farwell common stock entitled to vote is
necessary to constitute a quorum at the special meeting of shareholders.
Abstentions and broker non-votes will be counted for the purpose of determining
whether a quorum is present but will not be counted as votes cast either for or
against the Merger Agreement.
Adoption of the Merger Agreement requires the affirmative vote of the holders of
66 2/3% of the shares of Farwell common stock issued and outstanding on the
record date. Accordingly, a failure to vote, an abstention or a broker non-vote
will have the same effect as a vote against the Merger Agreement. As of the
record date, directors and executive officers of Farwell beneficially owned
__________ shares of Farwell common stock entitled to vote at the special
meeting of shareholders. This represents approximately _____% of the total votes
entitled to be cast at the special meeting. These individuals have indicated
that they will vote "FOR" adoption of the Merger Agreement.
SOLICITATION OF PROXIES
For Farwell shareholders, the proxy that accompanies this document is being
solicited by Farwell's Board of Directors. In addition to solicitations by mail,
directors, officers, and regular employees of Farwell may solicit proxies from
shareholders personally or by telephone or other electronic means. Such
individuals will not receive any additional compensation for doing so. Farwell
will bear its own costs of soliciting proxies, which Farwell estimates will be
less than $20,000. Farwell also will make arrangements with brokers and other
custodians, nominees, and fiduciaries to send this document to beneficial owners
of Farwell common stock and, upon request, will reimburse those brokers and
other custodians for their reasonable expenses in forwarding these materials.
RECOMMENDATION OF THE BOARD OF DIRECTORS
Farwell's Board of Directors has unanimously approved the Merger Agreement and
the transactions contemplated by the Merger Agreement. The Board of Directors
believes that the Merger Agreement is fair to Farwell shareholders and is in the
best interest of Farwell and its
12
shareholders and recommends that you vote "FOR" the approval of the Merger
Agreement. See "The Merger and the Merger Agreement-Recommendation of the
Farwell Board of Directors and Reasons for the Merger."
THE MERGER AND THE MERGER AGREEMENT
The description of the merger and the Merger Agreement contained in this proxy
statement-prospectus describes the material terms of the Merger Agreement;
however, it does not purport to be complete. It is qualified in its entirety by
reference to the Merger Agreement. We have attached a copy of the Merger
Agreement as Appendix A and urge you to carefully review it.
GENERAL
Pursuant to the Merger Agreement, Farwell will merge with and into Farmers, a
wholly-owned subsidiary of IBT. Outstanding shares of Farwell common stock will
be converted into the right to receive 3.0382 shares of IBT common stock and
$29.00 in cash, subject to adjustment under certain circumstances. Cash will be
paid in lieu of any fractional share of IBT common stock. See "Merger
Consideration" below. At the effective time of the merger, Farwell's corporate
existence will terminate; and Farmers will continue as the surviving bank with a
Board of Directors consisting of Dennis Angner, Michael McGuire, Dale Weburg,
James Fabiano and David Maness. The name of the surviving bank shall be FSB.
THE PARTIES
FARMERS (PAGE ___)
Farmers, a Michigan chartered commercial bank, is headquartered in Breckenridge,
Michigan, and operates three offices. As of March 31, 2006, Farmers had assets
of $136.4 million, deposits of $111.7 million and shareholders equity of $13.0
million. Farmers' principal executive office is located at 316 East Saginaw
Street, Breckenridge, Michigan, 48615, and the telephone number is (989)
842-3191.
FARWELL
Farwell, a Michigan chartered commercial bank is headquartered in Farwell,
Michigan, and operates two offices. As of March 31, 2006, Farwell had assets of
$91.6 million, deposits of $76.8 million and shareholders' equity of $13.7
million. Farwell's principal executive office is located at 399 West Main
Street, Farwell, Michigan, 48622, and the telephone number is (989) 588-9945.
IBT
IBT, headquartered in Mt. Pleasant, Michigan, is the holding company for Farmers
and Isabella Bank and Trust, which operate 20 full service offices and IBT Title
and Insurance Agency which operates five offices. As of March 31, 2006, IBT had
consolidated assets of $761.7 million, deposits of $616.7 million and
shareholders' equity of $81.8 million. IBT was organized in 1988. As of March
31, 2006, IBT had 5,484,325 shares of outstanding common stock.
The principal executive office of IBT is located at 200 East Broadway, Mt.
Pleasant, Michigan, 48858, and the telephone number is (989) 772-9471.
MERGER CONSIDERATION
Under the terms of the Merger Agreement, each outstanding share of Farwell
common stock (other than dissenting shares) will be converted upon completion of
the merger into the right to receive 3.0382 shares of IBT common stock and
$29.00 in cash, subject to adjustment under certain circumstances.
No fractional shares of IBT will be issued in connection with the merger.
Instead, Farmers will make a cash payment to each Farwell shareholder who would
otherwise receive a fractional share.
Based on the last transaction price in IBT common stock known to management
occurring prior to the mailing of this Proxy Statement-Prospectus on
_______________, 2006, each share of Farwell common stock that is exchanged
solely for IBT common stock and cash would be converted into shares of IBT
common stock and cash having a value of $_____.
13
SURRENDER OF STOCK CERTIFICATES
PLEASE DO NOT FORWARD YOUR FARWELL STOCK CERTIFICATES WITH YOUR PROXY CARDS.
STOCK CERTIFICATES SHOULD BE RETURNED TO THE EXCHANGE AGENT IN ACCORDANCE WITH
THE INSTRUCTIONS CONTAINED IN THE LETTER OF TRANSMITTAL WHICH WILL BE PROVIDED
TO SHAREHOLDERS AS SOON AS PRACTICABLE AFTER COMPLETION OF THE MERGER.
BACKGROUND OF MERGER
The terms and conditions of the Merger Agreement are the result of arm's length
negotiations between the representatives of Farmers and IBT and the
representatives of Farwell. A summary of the background of these negotiations is
set forth below.
The Board of Directors and management of Farwell have periodically explored
the possibility of merging with another financial institution as part of the
ongoing fiduciary responsibility to its shareholders. During the past 15 years,
Farwell's management has had several conversations with IBT management about
becoming part of the IBT organization. In June 2003, the Board of Directors of
both institutions agreed to formally explore the potential of a merger. The
companies agreed to retain Austin Associates, LLC of Toledo, Ohio as a
facilitator.
From July 2003 through July 2005, various discussions took place between
management and the Boards of Directors. These discussions included operating
philosophies, employee benefits, price and management of Farwell post-merger. As
a result of these discussions, the parties agreed to the price and the basic
structure of the transaction and, on October 3, 2005, executed a confidentiality
agreement. During October, November and December, 2005, the parties performed
due diligence and reviewed the draft of the definitive Merger Agreement. The
Board of Directors of both institutions agreed unanimously to sign the initial
agreement, which was signed on December 22, 2005.
Subsequent to the initial agreement's signing, IBT and Farwell began
preparing the required regulatory applications. As part of the regulatory
application preparation process, legal counsel had discussions with the
supervisor of the research department of the Federal Reserve Bank of Chicago
(FRB). Based on these discussions, the likelihood that the FRB would approve the
merger was extremely poor due to anti-competitive deposit market concentration.
The market as defined by the FRB was extremely narrow and included only the
deposits of commercial bank branches in Clare and Isabella counties.
Based on preliminary market research results, management of both
institutions believed that the FRB market area definition and restructuring the
market measurement to deposits only grossly overstated the anti-competitive
results of the proposed transaction. At the request of management, legal counsel
had discussions with the Federal Deposit Insurance Corporation (FDIC) about
their criteria and requirement to approve the proposed transaction. Based on the
criteria set forth by the FDIC and advice of legal counsel, Farwell and IBT
undertook further negotiations to change the structure of the transaction in
order to move the regulatory venue to the FDIC.
On March 6, 2006, the parties agreed in principal on the restructuring of
the initial agreement. The restructured transaction as set forth in the Merger
Agreement involves the merger of Farwell with and into Farmers, a wholly owned
subsidiary of IBT. As a result of the merger, Farmers will change its name to
FSB Bank. The revised structure and changes to the initial agreement were
unanimously approved by the Board of Directors of Farmers on April 19, 2006, by
the IBT Board on April 18, 2006 and the Farwell Board on May 2, 2006; and the
Merger Agreement was signed on May 2, 2006.
RECOMMENDATION OF FARWELL'S BOARD OF DIRECTORS AND REASONS FOR THE MERGER
The Board of Directors of Farwell has approved the Merger Agreement and has
determined that the merger is fair to and in the best interests of Farwell and
its shareholders. In reaching its decision to approve the Merger Agreement, the
Board of Directors consulted with its outside counsel regarding the legal terms
of the merger and the Board of Director's fiduciary obligations in its
consideration of the proposed merger, considered the financial aspects and
fairness of the proposed Merger Agreement from a financial point of view and
consulted with the management of Farwell regarding the future prospects of
Farwell as an independent entity and as part of IBT. Without assigning any
relative or specific weight, the Board of Directors of Farwell considered a
number of factors, including the following both from a short-term and long-term
perspective:
- The merger consideration to be paid to Farwell shareholders;
- The structure of the merger and the financial and other terms of the Merger
Agreement, including the fact that the merger is conditioned upon Farwell's
receipt of financial analysis and opinions to be delivered by Austin
Associates, LLC and Donnelly, Penman & Partners that the terms of the
Merger Agreement are fair to the shareholders of Farwell from a financial
point of view;
- The fact that the transaction was structured to keep Farwell's offices open
and to provide that no employee would be laid off;
14
- The Board of Directors reviews, with its legal and financial advisors, of
alternatives to the merger, the range and possible value to Farwell
shareholders obtainable through such alternatives and the timing and
likelihood of the alternatives.
- The familiarity of the Board of Directors of Farwell with, and review of,
its business, financial condition, results of operations and prospects,
including, but not limited to, its potential growth, development,
productivity and profitability and the business risks associated with the
merger;
- The current and prospective environment in which Farwell operates,
including national and local economic conditions, the highly competitive
environment for financial institutions generally, the increased regulatory
burden on financial institutions, the trend toward consolidation in the
financial services industry, and the increasing importance of operational
scale and financial resources in maintaining efficiency, remaining
competitive, and capitalizing on technological developments.;
- The potential for appreciation in market and book value of Farwell's common
stock on both a short- and long-term basis, as a stand-alone entity;
- Information concerning IBT's management, business, financial condition,
results of operations, asset quality and prospects, including the long-term
growth potential of IBT, the future growth prospects of IBT combined with
Farwell following the proposed merger, the potential synergies expected
from the merger and the business risks associated with the merger;
- The United States federal income tax consequences to Farwell shareholders
of receiving the merger consideration in exchange for their shares of
Farwell common stock;
- The advantages and disadvantages of Farwell remaining an independent
institution or affiliating with a larger institution;
- The short- and long-term interests of Farwell and its shareholders, the
interests of the employees, customers, creditors and suppliers of Farwell,
and the interests of Farwell's community, all of which may benefit from an
appropriate affiliation with a larger institution with increased economies
of scale and with a greater capacity to serve all of the banking needs of
the community;
- The fact that some of Farwell's directors and executive officers have
interests in the merger that are in addition to and may differ from the
interests of Farwell shareholders. See "Interests of Directors and Officers
In the Merger"; and
- The compatibility of the businesses and management philosophies of Farwell
and IBT and IBT's strong commitment to the communities it serves.
On the basis of these considerations, the Merger Agreement was unanimously
approved by Farwell's Board of Directors.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS ADOPTION OF THE AGREEMENT AND PLAN
OF MERGER BY THE SHAREHOLDERS OF FARWELL.
OPINIONS OF FARWELL'S, FARMER'S AND IBT'S FINANCIAL ADVISORS
The fairness opinions of the financial advisors, Austin Associates, LLC ("AAL")
and Donnelly Penman & Partners ("Donnelly Penman") are described below. The full
text of the fairness opinions which set forth, among other things, assumptions
made, procedures followed, matters considered and limitations on the review
undertaken are attached to this document as Appendix B and C, respectively.
Shareholders of Farwell are urged to read the fairness opinions carefully and in
their entirety. To the extent that the descriptions contain projections,
estimates and/or other forward-looking statements about the future earnings or
other measures of the future performance of IBT, you should not rely on any of
these statements as having been made or adopted by IBT unless they have been
made by IBT in a document that is incorporated by reference into this proxy
statement-prospectus. See "Where You Can Find More Information."
AUSTIN ASSOCIATES, LLC OPINION
Farwell and IBT retained Austin Associates, LLC ("AAL") pursuant to an
engagement letter dated July 10, 2003 to provide financial advisory services in
connection with facilitating a potential business combination transaction under
which IBT would acquire Farwell. IBT and Farwell selected AAL based on its
experience, expertise and familiarity in representing community banks in similar
transactions. AAL is a nationally recognized investment banking firm and is
regularly engaged in the valuation of businesses and securities in connection
with mergers and acquisitions and valuations for corporate and other purposes.
15
AAL issued its written opinion dated _______ __, 2006, that the financial terms
of the Merger Agreement are fair to each company and their respective
shareholders. AAL's written opinion is attached as Appendix B to this Proxy
Statement/Prospectus.
You should consider the following when reading the discussion of AAL's opinion
in this document:
- The summary of the AAL opinion set forth in this Proxy
Statement/Prospectus is qualified in its entirety by reference to the
full text of the opinion that is attached as Appendix B to this
document. You should read the opinion in its entirety for a full
discussion of the procedures followed, assumptions made, matters
considered and qualifications and limitations of the review undertaken
by AAL in connection with its opinion.
- AAL expressed no opinion as to the price at which IBT common stock
would actually be trading at any time.
- The AAL opinion does not address the relative merits of the Merger and
the other business strategies considered by IBT or Farwell, nor does
it address the IBT or Farwell board decision to proceed with the
Merger.
- The AAL opinion to the IBT and Farwell boards rendered in connection
with the Merger does not constitute a recommendation to any Farwell
shareholder as to how he or she should vote at the special meeting.
In connection with its opinion, AAL made the following assumptions:
- that the Merger will be accounted for as a "purchase" in accordance
with generally accepted accounting principles;
- that all material governmental, regulatory and other consents and
approvals necessary for the consummation of the Merger would be
obtained without any adverse effect to IBT, Farwell or on the
anticipated benefits of the Merger;
- that IBT and Farwell had provided it with all of the information
prepared by IBT and Farwell or its other representatives that might be
material to AAL in its review; and
- that the financial projections it reviewed were reasonably prepared on
a basis reflecting the best currently available estimates and judgment
of the management of IBT and Farwell as to the future operating and
financial performance of IBT and Farwell, respectively.
In addition, AAL:
- reviewed the Merger Agreement and publicly available business and
financial information relating to IBT and Farwell that it considered
relevant;
- reviewed other information relating to IBT and Farwell, including
internal financial forecasts and forecasts of cost savings to be
achieved in the merger;
- held discussions with IBT and Farwell management related to the
business and prospects of the pro forma company;
- considered financial and stock market information about IBT and
Farwell and compared that information with similar information about
other publicly traded financial institutions;
- considered the financial terms of other recent business combinations
among financial institutions; and
- considered such other studies, analyses, inquiries and examinations as
AAL deemed appropriate.
In connection with its review, AAL did not assume any responsibility for
independent verification of any of the information provided to or otherwise
reviewed by AAL. AAL relied on this information being complete and accurate in
all material respects. As to the financial forecasts, including the estimates of
future cost savings expected to be achieved as a result of the merger, AAL
assumed that these forecasts were reasonably prepared and reflected the best
currently available estimates and judgments of the management of IBT and Farwell
as to the future financial performance of IBT and Farwell. In addition, IBT and
Farwell did not ask AAL to make, and AAL did not make, an
16
independent evaluation or appraisal of the assets or liabilities, contingent or
otherwise, of IBT or Farwell, nor was AAL furnished with any evaluations or
appraisals of this kind. IBT and Farwell placed no limits on the scope of
analysis performed, or opinion expressed, by AAL.
In preparing its opinion, AAL performed a variety of financial and comparative
analyses, the material aspects of which are described below. The preparation of
a fairness opinion is a complex analytic process involving various
determinations as to the most appropriate and relevant methods of financial
analyses and the application of those methods to the particular circumstances.
Therefore, such an opinion is not readily susceptible to partial analysis or
summary description. In arriving at its opinion, AAL made qualitative judgments
as to the significance and relevance of each analysis and factor considered by
it. Accordingly, AAL believes that its analyses must be considered as a whole
and that selecting portions of its analyses and factors, without considering all
analyses and factors, could create a misleading or incomplete view of the
process underlying its analyses and its opinion.
The following is a summary of the material financial analyses performed by AAL
in connection with its written opinion rendered to the IBT and Farwell boards of
directors as of _______ __, 2006. Certain of these summaries include information
presented in tabular format. In order to fully understand the financial analyses
used by AAL, these tables must be read together with the accompanying narrative.
The tables alone do not constitute a complete description of the applicable
financial analysis.
SUMMARY OF FINANCIAL TERMS OF AGREEMENT: AAL reviewed the financial terms of the
proposed transaction, including the form of consideration and the exchange
ratio. Under the terms of the Merger Agreement, each outstanding share of
Farwell common stock shall be exchanged for 3.0382 shares of IBT common stock
plus $29.00 in cash. Based on a market price of $43.00 for each IBT share (as of
May 2, 2006), the market value of the total transaction consideration payable to
Farwell shareholders is $159.64 per share, or $41.9 million in the aggregate for
100% of Farwell shares. Farwell reported 262,500 shares outstanding at March 31,
2006. No fractional shares of IBT common stock shall be issued in the Merger.
Cash will be paid in lieu of fractional shares based on the value of IBT common
stock of $42.00 per share.
PREPARATION OF FINANCIAL ANALYSIS: In connection with AAL's role as financial
advisor, AAL prepared various financial analyses as summarized below. These
analyses were based on March 31, 2006 financial information.
CONTRIBUTION ANALYSIS: The contribution analysis performed by AAL compares
the relative contribution of key balance sheet and income statement
measures by IBT and Farwell to the pro-forma company. AAL also compared the
contribution of market value as determined by IBT's current market
capitalization and Farwell's value as determined in the transaction with
IBT.
IBT FARWELL
COMBINED --------------- --------------
($000) ($000) % ($000) %
-------- -------- ---- ------- ----
Assets $853,299 $761,749 89.3% $91,550 10.7%
Equity $ 95,549 $ 81,818 85.6% $13,731 14.4%
Tangible Equity $ 92,319 $ 78,588 85.1% $13,731 14.9%
Last 12 months (LTM) $ 8,153 $ 6,647 81.5% $ 1,506 18.5%
Net Income
MARKET VALUE (1) $277,732 $235,826 84.9% $41,906 15.1%
(1) IBT's market value based on $43.00 per share times 5,484,324 shares
outstanding. Farwell's market value based on 3.0382 shares of IBT common
stock for each share of Farwell plus $29.00 in cash. Farwell reported
262,500 shares outstanding.
The range of contribution from Farwell in terms of assets, equity and net income
ranges from 10.7 percent to 18.5 percent in the pro forma company. The actual
market value contribution of Farwell equals 15.1 percent.
RELATIVE DISCOUNTED CASH FLOW VALUES: AAL calculated discounted cash flow
("DCF") values of both IBT and Farwell, and computed the relative DCF value
contribution of each organization to the combined company. The DCF value of IBT
was computed on the basis of a stand-alone, going concern company. The
calculation is based on a five year projection of key financial inputs including
total assets, net income and capital levels, among other variables. The
projected cash flows and residual value are discounted to a present value under
this methodology. The following provides highlights for the projected
performance of IBT:
17
ACTUAL PROJECTED LTM ENDING ($000)
LTM ------------------------------------------------------
STAND-ALONE 03/06 03/07 03/08 03/09 03/10 03/11
----------- -------- -------- -------- -------- -------- ----------
Assets $761,749 $807,454 $855,901 $907,255 $961,691 $1,019,392
Net Income $ 6,647 $ 7,344 $ 7,979 $ 8,664 $ 9,403 $ 10,199
ROAA 0.93% 0.94% 0.96% 0.98% 1.01% 1.03%
Note: LTM = last twelve months
AAL determined the resulting aggregate DCF value of IBT at $112.7 million.
A DCF analysis of Farwell was prepared on a control level basis by computing a
stand-alone value for the company and adding the present value of potential cost
savings related to the Merger. The following provides highlights for the key
assumptions used in this analysis:
ACTUAL PROJECTED LTM ENDING ($000)
LTM ----------------------------------------------------
STAND-ALONE 03/06 03/07 03/08 03/09 03/10 03/11
----------- -------- -------- -------- -------- -------- --------
Assets $91,550 $94,297 $97,125 $100,039 $103,040 $106,132
Net Income $ 1,506 $ 1,474 $ 1,518 $ 1,564 $ 1,611 $ 1,659
ROAA 1.65% 1.59% 1.59% 1.59% 1.59% 1.59%
Based on these performance assumptions, AAL determined the resulting DCF value
of Farwell, on a stand-alone basis, equal to $20.1 million. AAL also calculated
the present value of potential cost savings in connection with the Merger. AAL
considered pre-tax cost savings equal to 4.6 percent of Farwell's operating
expenses in the first year after the Merger, and 6.4 percent thereafter.
Combining the stand-alone DCF value of Farwell with the present value of
potential cost savings resulted in a pro forma DCF value of $21.7 million.
The following table provides the resulting DCF values for both IBT and Farwell
and the respective contribution to the pro forma company.
IBT (STAND-ALONE) FARWELL (SALE OF CONTROL)
----------------------- -------------------------
DCF ($000) DCF % DCF %
COMBINED VALUE CONTRIBUTION VALUE CONTRIBUTION
---------- -------- ------------ ------- ------------
$134,359 $112,679 83.9% $21,680 16.1%
The above table indicates the relative DCF value contribution of Farwell in the
pro forma company is 16.1 percent. This compares to the actual Farwell market
value contribution of 15.1 percent.
MARKET PREMIUM ANALYSIS FOR IBT: AAL compared the price-to-book and
price-to-core earnings multiples of IBT to guideline peer companies. AAL
utilized two guideline peer groups under this approach. The first guideline peer
group consisted of six Michigan publicly traded banks with assets between $500
million and $1.5 billion and last twelve-month core return on average equity
("ROAE") greater than 5 percent. The second guideline peer group consisted of 41
Midwest publicly traded banks with assets between $500 million and $1 billion
and last twelve-month core ROAE between 5 and 15 percent. The following table
provides the median financial and stock price data of the guideline peer groups
compared to IBT. IBT stock trades at a substantial premium to the median trading
multiples of both the Michigan and Midwest peer organizations.
18
MINORITY SHARE PEER GROUPS
--------------------------
MICHIGAN MIDWEST
IBT PEER PEER
-------- -------- --------
Total Assets $761,749 $671,323 $696,529
Tangible Equity/Assets 10.36% 9.16% 8.13%
LTM Core ROAA 0.93% 1.11% 0.98%
LTM Core ROAE 8.66% 10.91% 10.69%
Market Price Per Share $ 43.00 N.M. N.M.
Price to Tangible Book 300% 171% 180%
Price to LTM Core EPS 35.2x 15.5x 15.2x
IBT STOCK PRICE-TO-TANGIBLE BOOK AS PERCENT OF
PEER MEDIAN PRICE-TO-TANGIBLE BOOK RATIO 175% 167%
IBT STOCK PRICE-TO-CORE EPS AS PERCENT OF PEER
MEDIAN PRICE-TO-CORE EPS MULTIPLE 227% 232%
The above table indicates that IBT's stock trades at a premium of 67 percent to
75 percent over the peer median price-to-tangible book value ratio. Also, IBT's
stock trades at a premium of 127 percent to 132 percent over the peer median
price-to-last twelve months ("LTM") core earnings per share.
MARKET PREMIUM ANALYSIS FOR FARWELL: AAL compared the price-to-book and
price-to-LTM earnings multiples being received by Farwell shareholders in the
Merger to guideline peer companies. AAL also utilized two guideline peer groups
under this approach. The first guideline transaction peer group consisted of 31
Midwest bank deals announced from January 1, 2004 through May 2, 2006 with
seller's assets between $50 and $250 million, year-to-date return on average
assets ("ROAA") greater than 0.5 percent, and tangible equity to assets greater
than 8.0 percent. The second guideline transaction group was based on a national
listing of sale transactions which consisted of 27 bank deals announced from
January 1, 2004 to May 2, 2006 with the seller's assets between $75 and $150
million, year-to-date ROAA greater than 0.75 percent, and tangible equity to
tangible assets greater than 10.0 percent. The following table provides the
median financial and deal pricing multiples for the guideline transaction peer
groups compared to the pricing multiples being received by Farwell shareholders
in the Merger.
GUIDELINE SALE OF CONTROL
---------------------------
MIDWEST NATIONAL
FARWELL TRANSACTIONS TRANSACTIONS
------- ------------ ------------
Total Assets $91,550 $102,749 $115,728
Tangible Equity/Assets 14.99% 9.84% 11.26%
LTM ROAA 1.65% 0.94% 1.17%
LTM ROAE 10.95% 8.91% 10.65%
Price to Tangible Book 305% 170% 220%
Price to LTM Earnings 27.8x 19.7x 22.5x
FARWELL DEAL VALUE PRICE-TO-TANGIBLE BOOK
AS PERCENT OF PEER MEDIAN
PRICE-TO-TANGIBLE BOOK RATIO 179% 139%
FARWELL DEAL VALUE PRICE-TO-LTM EARNINGS
AS PERCENT OF PEER MEDIAN PRICE-TO-LTM
EARNINGS 141% 124%
The above table indicates the Farwell deal transaction multiples are at a
premium to the market. The price-to-tangible book premium ranges from 39 to 79
percent, while the price-to-LTM earnings premium ranges from 24 to 41 percent
over the guideline transaction multiples.
APPLICATION OF GUIDELINE PRICING MULTIPLES AND RESULTING CONTRIBUTION ANALYSIS:
AAL reviewed the guideline peer groups identified in the above tables and
applied current market pricing multiples to both IBT and Farwell book value and
earnings levels. AAL utilized minority share guideline transaction multiples for
IBT and control level multiples for Farwell. The guideline pricing multiples
assigned to each company were subjectively determined after consideration of the
respective underlying performance characteristics of both IBT and Farwell. AAL
computed the aggregate value of each company using the selected
price-to-tangible
19
book and price-to-earnings multiples. The following chart summarizes the
aggregate results and the resulting contribution that each company would make to
the combined organization:
IBT % FARWELL %
-------- ---- ------- ----
Tangible Book Value $ 78,588 $13,731
Guideline Multiple 170% 160%
-------- -------
PRICE/TANGIBLE BOOK $133,600 85.9% $21,970 14.1%
LTM Net Income $ 6,647 $ 1,506
Guideline Multiple 15.0 14.0
-------- -------
PRICE/LTM EARNINGS $ 99,705 82.5% $21,084 17.5%
The above table indicates a contribution by Farwell ranging from 14.1
percent to 17.5 percent using guideline transaction-based market values.
This compares to the actual Farwell market value contribution of 15.1
percent.
The opinion expressed by AAL was based on market, economic and other
relevant considerations as they existed and could be evaluated as of the date of
the opinion. Events occurring after the date of issuance of the opinion,
including but not limited to, changes affecting the securities markets, the
results of operations or material changes in the financial condition of either
IBT or Farwell could materially affect the assumptions used in preparing this
opinion.
IBT and Farwell have agreed to pay AAL customary fees for its services as
financial advisor in connection with the Merger. In addition to its fees and
regardless of whether the merger is consummated, IBT and Farwell have agreed to
reimburse AAL for its reasonable out-of-pocket expenses, and to indemnify AAL
against certain liabilities, including liabilities under securities laws.
FAIRNESS OPINION OF DONNELLY PENMAN & PARTNERS
Farwell retained Donnelly Penman & Partners ("Donnelly Penman") to act as
Farwell's financial advisor in connection with the merger and related matters
based upon its qualifications, expertise and reputation, as well as its
familiarity with Farwell. Donnelly Penman is a recognized investment banking and
advisory firm. As a part of its investment banking and advisory business,
Donnelly Penman is continually engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate and
other purposes.
On December 22, 2005 IBT, a bank holding company headquartered in Mt. Pleasant,
Michigan and Farwell announced that they had entered into an Agreement and Plan
of Merger (the "Agreement") to which IBT would acquire Farwell. On May 2, 2006
IBT, Farmers, a subsidiary of IBT, and Farwell entered into an amended and
restated Agreement and Plan of Merger (the "Merger Agreement") to substitute
Farmers as the acquiring entity. In accordance with the terms of the Merger
Agreement, Farwell will merge with Farmers with Farmers as the surviving entity.
Concurrently, each share of Farwell common stock issued and outstanding
immediately prior to the effective time of the merger shall be converted into
the right to receive 3.0382 shares of IBT common stock plus $29.00 in cash.
Donnelly Penman has delivered its opinion that the exchange ratio and cash
consideration received is fair to Farwell's shareholders from a financial point
of view. No limitations were imposed by Farwell on the scope of Donnelly
Penman's investigation or on the procedures followed by Donnelly Penman in
rendering its opinion.
THE FULL TEXT OF THE OPINION OF DONNELLY PENMAN, WHICH SETS FORTH, AMONG OTHER
THINGS, ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITS ON
THE REVIEW UNDERTAKEN BY DONNELLY PENMAN, IS ATTACHED AS APPENDIX C TO THIS
PROXY STATEMENT-PROSPECTUS. HOLDERS OF FARWELL COMMON STOCK ARE URGED TO READ
THE OPINION IN ITS ENTIRETY. DONNELLY PENMAN'S OPINION IS DIRECTED ONLY TO THE
MERGER CONSIDERATION DESCRIBED IN THE MERGER AGREEMENT AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY FARWELL SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE
AT THE FARWELL SPECIAL SHAREHOLDER MEETING. THE SUMMARY SET FORTH IN THIS PROXY
STATEMENT-PROSPECTUS OF THE OPINION OF DONNELLY PENMAN IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF ITS OPINION ATTACHED TO THIS DOCUMENT
AS APPENDIX C.
In arriving at its opinion, Donnelly Penman engaged in discussions with members
of the management of each of Farwell and IBT concerning the historical and
current business operations, financial conditions and prospects of Farwell and
IBT and reviewed:
o the Agreement and Plan of Merger dated December 22, 2005 and
the Amended and Restated Agreement and Plan of Merger dated
May 2, 2006;
o the most recent draft dated June 29, 2006 of the Form S-4
Registration Statement relating to the merger;
o certain publicly-available information for IBT, including each
of the Annual Reports to Stockholders and Annual Reports on
Form 10-K for the years December 31, 2003, 2004 and 2005 and
the quarterly reports on Form 10-Q for the quarter ended March
31, 2006;
o certain information, including financial forecasts, relating
to earnings, assets, liabilities and prospects of IBT
furnished by senior management of IBT;
o Independent Auditor's Report for Farwell State Bank for the
years ended December 31, 2005 and 2004 and the unaudited
condensed balance sheet and statement of income for the three
months ended March 31, 2006 and March 31, 2005;
o certain information, including financial forecasts, relating
to earnings, assets, liabilities and prospects of Farwell
furnished by senior management of Farwell;
20
o IBT's senior management projected earnings estimates for
fiscal years 2006 through 2010, which were deemed reasonable
by IBT management;
o Farwell's senior management projected earnings estimates for
fiscal years 2006 through 2010, which were deemed reasonable
by Farwell management;
o the amount and timing of the cost savings expected to result
from the merger furnished by senior management of IBT;
o the financial condition and operating results of IBT and
Farwell compared to the financial conditions and operating
results of certain other financial institutions that Donnelly
Penman deemed comparable;
o various valuation analyses of Farwell and IBT Donnelly Penman
performed including dividend discount analyses, analysis of
comparable transactions and analysis of comparable companies;
and
o such other information, financial studies, analyses and
investigations and such other factors that Donnelly Penman
deemed relevant for the purposes of its opinion.
In conducting its review and arriving at its opinion, as contemplated under the
terms of its engagement by Farwell, Donnelly Penman, with the consent of IBT and
Farwell, relied, without independent investigation, upon the accuracy and
completeness of all financial and other information provided to it by IBT and
Farwell or upon publicly-available information. Donnelly Penman did not
undertake any responsibility for the accuracy, completeness or reasonableness
of, or any obligation independently to verify, such information. Donnelly Penman
further relied upon the assurance of management of IBT and Farwell that they
were unaware of any facts that would make the information provided or available
to Donnelly Penman incomplete or misleading in any respect. Donnelly Penman did
not make any independent evaluations, valuations or appraisals of the assets or
liabilities of IBT or Farwell. Donnelly Penman did not review any individual
credit files of IBT or Farwell and assumed that the aggregate allowances for
credit losses for IBT and Farwell were adequate to cover such losses. Donnelly
Penman's opinion was necessarily based upon economic and market conditions and
other circumstances as they existed and were evaluated by Donnelly Penman on the
date of its opinion. Donnelly Penman does not have any obligation to update its
opinion, unless requested by Farwell in writing to do so, and Donnelly Penman
expressly disclaims any responsibility to do so in the absence of any written
request by Farwell.
In connection with rendering its opinion to the Farwell Board, Donnelly Penman
performed a variety of financial analyses, which are summarized below. Donnelly
Penman believes that its analyses must be considered as a whole and that
selecting portions of its analyses and the factors considered by it, without
consideration of all factors and analyses, could create a misleading view of the
analyses and the processes underlying Donnelly Penman's opinion. Donnelly Penman
arrived at its opinion based on the results of all the analyses it undertook
assessed as a whole, and it did not draw conclusions from or with regard to any
one method of analysis. The preparation of a fairness opinion is a complex
process involving subjective judgments, and is not necessarily susceptible to
partial analysis or summary description. With respect to the analysis of
selected comparable companies and analysis of selected comparable merger of
equal transactions summarized below, no public company utilized as a comparison
is identical to IBT or Farwell, and such analyses necessarily involve complex
considerations and judgments concerning the differences in financial and
operating characteristics of the relevant financial institutions and other
factors that could affect the acquisition or public trading values of the
financial institutions concerned.
21
The financial forecast information and cost savings and other synergies expected
to result from the merger furnished by management of IBT and Farwell,
respectively, and deemed reasonable by them contained in or underlying Donnelly
Penman's analyses are not necessarily indicative of future results or values,
which may be significantly more or less favorable than such forecasts and
estimates. The forecasts and estimates were based on numerous variables and
assumptions that are inherently uncertain, including factors related to general
economic and competitive conditions. In that regard, Donnelly Penman assumed,
with IBT's and Farwell's consent, that the financial forecasts, including the
cost savings and other synergies expected to result from the merger, were
reasonably prepared on a basis reflecting the best currently available judgments
of IBT and Farwell, and that such forecasts will be realized in the amounts and
at the times that they contemplate. The estimates contained in Donnelly Penman's
analyses are not necessarily indicative of actual values or future results,
which may be significantly more or less favorable than those suggested by those
analyses. Estimates of values of financial institutions or assets do not purport
to be appraisals or necessarily reflect the prices at which financial
institutions or their securities actually may be sold. Accordingly, actual
results could vary significantly from those assumed in the financial forecasts
and related analyses. None of the analyses performed by Donnelly Penman was
assigned a greater significance by Donnelly Penman than any other.
The following is a brief summary of the analyses performed by Donnelly Penman.
Certain analyses have been updated to reflect currently available information
for purposes of the written fairness opinion.
SUMMARY ANALYSIS OF THE TRANSACTION
The Merger Agreement provides that each share of Farwell common stock issued and
outstanding immediately prior to the effective time of the merger shall be
converted into the right to receive 3.0382 shares of IBT common stock plus
$29.00 in cash.
Donnelly Penman reviewed the terms of the merger. It noted that the exchange
ratio of 3.0382 shares of IBT common stock for each share of Farwell common
stock and cash consideration of $29.0 per share meant that the transaction had
an implied per share value of $145.00 for each share of Farwell common stock
based upon the closing price of IBT of $38.18 on December 15, 2005. This implied
per share value represents a 277.2% premium to the book value per Farwell share
of $52.31 as of March 31, 2006. Donnelly Penman also noted that, based on the
exchange ratio and cash consideration the transaction had an implied aggregate
value of approximately $38.1 million (exclusive of transaction costs) as of
December 15, 2005. The complete aggregate deal metrics in relation to the
Farwell financial position as of March 31, 2006 are displayed below:
FOR THE TWELVE MONTHS ENDED MARCH 31, 2006
-------------------------------------------------------------------------------------------------------------------
Deal Price Price/Tangible Price/LTM Premium to Core
(Aggregate) Price/Book Book Earnings Price/Assets Price/Deposits Deposits
-------------------------------------------------------------------------------------------------------------------
$ 38,062 277.2% 277.2% 25.3x 41.6% 49.6% 40.4%
22
Donnelly Penman also noted, when considering the most recent trading based upon
the closing price of IBT of $45.00 on June 28, 2005 that the exchange ratio of
3.0382 shares of IBT common stock for each share of Farwell common stock and
cash consideration of $29.00 per share meant that the transaction had an implied
per share value of $165.72 for each share of Farwell common stock. This implied
per share value represents a 316.8% premium to the book value per Farwell share
of $52.31 as of March 31, 2006.
Donnelly Penman also noted, when considering the value of the transaction based
on an implied equity value per share of IBT of $23.79 that the exchange ratio of
3.0382 shares of IBT common stock for each share of Farwell common stock and
cash consideration of $29.00 per share meant that the transaction had an implied
per share value of $101.28 for each share of Farwell common stock. This implied
per share value represents a 193.6% premium to the book value per Farwell share
of $52.31 as of March 31, 2006. The $23.79 implied per share value for IBT is
based on an assumed price to tangible book multiple of 1.66 times IBT's tangible
book value of $14.33 as of March 31, 2006. The price to tangible book multiple
is based on a review of the multiples for select publicly traded Midwest
commercial banks with assets of $500 million to $1 billion and a return on
average equity between 8% and 12%.
Donnelly Penman also noted, when considering the value of the transaction based
on an implied equity value per share of IBT of $20.34 that the exchange ratio of
3.0382 shares of IBT common stock for each share of Farwell common stock and
cash consideration of $29.00 per share meant that the transaction had an implied
per share value of $90.80 for each share of Farwell common stock. This implied
per share value represents a 173.6% premium to the book value per Farwell share
of $52.31 as of March 31, 2006. The $20.34 implied per share value for IBT is
based on a discounted dividend analysis. This analysis utilized a range of
discount rates of 11.0% to 14.0% and a range of terminal value multiples of 14.0
to 17.0 times projected 2010 net income. The discount rate was derived from the
Ibbotson and Associates 20051 data on cost of equity buildup (and sensitized a
range of 11.0%-14.0%). The terminal multiple range was determined by reviewing
the multiples for select publicly traded placeMidwest commercial banks with
assets between $500 million and $1 billion and return on average equity between
8% and 12%.
23
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1 Stocks, Bonds, Bills and Inflation - Valuation Edition 2006 Yearbook,
(C)Ibbotson Associates, Inc. 2006
ANALYSIS OF SELECTED COMPARABLE COMPANIES
Donnelly Penman compared selected financial and operating results of Farwell to
a peer group that included the following 18 exchange traded commercial banks in
Illinois, Indiana, Michigan, Ohio and Wisconsin, which were selected based on
comparable asset size and financial returns. Specifically the peer group
identified had assets less than $250 million and a last twelve month's return on
average equity between 8% and 12%. The peer group had median trading multiples
of 139.2% of book value per share, 139.2% of tangible book value per share and
16.79 times last twelve months earnings per share. These peer companies
consisted of:
- American Community Bancorp (ACBP)
- Capital Directions, Incorporated (CTDN)
- Century Financial Corporation (CYFL)
- ChoiceOne Financial Corporation (COFS)
- Community National Corporation (CMNC)
- Community Shores Bank Corporation (CSHB)
- Communibanc Corporation (CBCZ)
- Consumers Bancorp, Inc. (CBKM)
- CSB Bancorp, Inc. (CBMI)
- Eastern Michigan Financial Corporation (EFIN)
- F & M Bancorp (FMOO)
- FNB, Inc. (FIDS)
- Heartland Bancshares, Inc. (HRTB)
- ICNB Financial Corporation (ICNB)
- Layton Park State Bank (LTPM)
- Ohio Heritage Bancorp, Inc. (OHHB)
- United Commerce Bancorp (UCBN)
- Western Reserve Bancorp, Inc. (WRBO)
This comparison showed, among other things, that for the latest twelve months
ended March 31, 2006:
o Farwell's net interest margin was 3.94%, compared with the
Farwell peer group median of 4.06%;
o Farwell's efficiency ratio was 43.96%, compared with the
Farwell peer group median of 68.61%;
o Farwell's return on average assets was 1.65%, compared to the
Farwell peer group median of 0.88%;
o Farwell's return on average equity was 10.95%, compared to the
Farwell peer group median of 9.30%; and
o Farwell's ratio of nonperforming assets to total assets was
0.11%, compared with the Farwell peer group median of 0.42%.
No financial institution used in the above analyses as a comparison is identical
to Farwell. Accordingly, an analysis of the results of the foregoing necessarily
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the companies and other factors that
could affect the public trading values of Farwell and the financial institutions
to which it was compared.
24
ANALYSIS OF SELECTED COMPARABLE TRANSACTIONS
Donnelly Penman reviewed and compared actual information for 19 completed or
pending bank merger transactions announced from a period of January 1, 2003 to
December 31, 2005. Furthermore, the transactions listed involved commercial
banks located in Illinois, Indiana, Michigan, Ohio and Wisconsin with total
assets less than $250 million and a last twelve month's return on average equity
of between 8% and 12%. These transactions consisted of:
(Buyer/Seller)
- MainSource Financial Group/ HFS Bank FSB
- Hometown Community Bncp Inc/ Progressive Bancorp Inc.
- River Holding Co./ Farmers State Bancshares Inc.
- Peotone Bancorp Inc./ Vermilion Bancorp Inc.
- Princeton National Bancorp/ Somonauk FSB Bancorp Inc.
- Peoples Community Bancorp Inc./ American State Corporation
- Park National Corp./ First Clermont Bank
- Webster Financial Corp./ Eastern Wisconsin Bcshrs Inc.
- Croghan Bancshares Inc./ Custar State Bank
- Wintrust Financial Corp./ Town Bankshares Ltd
- Camco Financial Corp./ London Financial Corp.
- Lincoln Bancorp/ First Shares Bancorp Inc.
- Harrodsburg First Fin Bancorp/ Independence Bancorp
- Van Orin Bancorp Inc./ Malden Bancorp Inc.
- State Financial Services Corp./ Lakes Region Bancorp Inc.
- Citizens First Bancorp Inc./ Metro Bancorp, Inc.
- Blackhawk Bancorp Inc./ DunC Corp.
- Carlinville Natl Bk Shares Inc/ Cornerstone Bank & Trust, NA
- JW Bancorp Inc./ John Warner Financial Corp.
This comparison showed that based on the transaction price calculated above
compared with Farwell's financial condition as of March 31, 2006:
o The transaction price to last twelve months earnings multiple
was 25.3 times, compared with the comparable transaction group
median of 20.0 times last twelve month's earnings;
o The transaction price was 277.2% of book value, compared with
the comparable transaction group median of 181.06%;
o The transaction price was 277.2% of tangible book value,
compared with the comparable transaction group median of
181.06%;
o The transaction price was 41.6% of total assets, compared with
the comparable transaction group median of 17.9%;
o The transaction price was 49.6% of deposits, compared with the
comparable transaction group median of 22.3%; and
o The transaction price represented a 40.4% premium to core
deposits, compared with the comparable transaction group
median of 12.7%.
Donnelly Penman recognized that no transaction reviewed was identical to the
merger and that, accordingly, any analysis of comparable transactions
necessarily involves complex considerations and judgments concerning differences
in financial and operating characteristics of the parties to the transactions
being compared.
25
DIVIDEND DISCOUNT ANALYSIS - FARWELL
Donnelly Penman calculated an estimated range of equity values per share for
Farwell based upon the values, discounted to the present, of estimates of
projected dividends from the fiscal year ending December 31, 2006 through the
fiscal year ending December 31, 2010 and a projected year 2010 terminal value
assuming Farwell continued to operate as an independent company. The valuation
date contemplated is July 1, 2006, with half of the 2006 dividends being paid in
the last six months of the year. In conducting its analysis, Donnelly Penman
utilized financial estimates provided by and deemed reasonable by Farwell and
IBT for 2006 through 2010. Donnelly Penman further assumed, with Farwell senior
management's consent, a $3.25 dividend payment per share in 2006 and each year
thereafter. Additionally, Donnelly Penman assumed that Farwell could pay a one
time special dividend at the beginning of the projection period. This special
dividend was estimated by Donnelly Penman as the excess capital that could be
distributed to shareholders and still leave Farwell at a 6.5% capital to assets
ratio. Then, estimated net income was reduced by the impact of the cost of cash
on the projected earnings.
This analysis utilized a range of discount rates of 11.0% to 14.0% and a range
of terminal value multiples of 14.0 to 17.0 times projected 2010 net income. The
discount rate was derived from the Ibbotson and Associates 20052 data on cost of
equity buildup and sensitized to the base cost of equity of 12% provided from
the Ibbotson and Associates Research (a range of 11.0%-14.0% was utilized). The
terminal multiple range was determined by reviewing the multiples for select
publicly traded Midwest commercial banks with assets less than $250 million and
return on average equity between 8% and 12%. The analysis resulted in a range of
present values between $92.30 and $103.23 per share.
The analysis was based upon Farwell and IBT senior management's projections of
future performance on a stand alone basis, which were based upon many factors
and assumptions deemed reasonable by Farwell and IBT senior management. This
analysis did not purport to be indicative of actual values or actual future
results and did not purport to reflect the prices at which any securities may
trade at the present or at any time in the future. Donnelly Penman included this
analysis because it is a widely used valuation methodology, but noted that the
results of such methodology are highly dependent upon the numerous assumptions
that must be made, including earnings growth rates, dividend payout rates,
terminal values and discount rates.
For its financial advisory services provided to Farwell, Donnelly Penman has
been paid ordinary and customary fees at or before the closing of the merger. In
addition, Farwell has agreed to indemnify Donnelly Penman against various
liabilities, including any which may arise under the federal securities laws.
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2 Stocks, Bonds, Bills and Inflation - Valuation Edition 2006
Yearbook,(C)Ibbotson Associates, Inc. 2006
INTERESTS OF DIRECTORS AND OFFICERS IN THE MERGER
DIRECTORS AND OFFICERS OF FARMERS FOLLOWING THE MERGER. Upon the completion of
the merger, Michael McGuire shall be added to the reconstituted Farmers' Board
of Directors. The current officers of Farwell will continue with Farmers. In
addition, Mr. Kedrowski will serve as a Vice-President of Farmers pursuant to a
two-year written employment agreement.
REGIONAL ADVISORY BOARD. Upon completion of the merger, the incumbent directors
of Farwell will serve on a regional advisory board for the Farwell division of
Farmers and shall receive the same board member compensation as provided by
Farwell prior to the merger.
INDEMNIFICATION. Pursuant to the Merger Agreement, Farmers has agreed that from
and after the effective date of the merger through the fifth anniversary
thereof, it will indemnify and hold harmless each present and former director,
officer and employee of Farwell against any costs or expenses (including
reasonable attorneys' fees), judgments, fines, losses, claims, damages or
liabilities incurred in connection with any claim, action, suit, proceeding or
investigation (each a "Claim"), arising in whole or in part out of, the fact
that such person is or was a director, officer, employee, fiduciary or agent of
Farwell or its subsidiary or is or was serving at the request of Farwell or its
subsidiary in such a role of another corporation, partnership, joint venture,
trust or other enterprise if such Claim pertains to any matters existing or
occurring at or before the effective date of the merger to the fullest extent to
which said individuals are entitled under applicable law.
DIRECTORS' AND OFFICERS' INSURANCE. Farmers has further agreed, for a period of
five years after the effective date of the merger, to maintain Farwell's current
directors' and officers' liability insurance policy (provided that Farmers may
substitute therefor policies of at least the same coverage and amounts
containing terms and conditions which are not materially less advantageous than
such policy) with respect to acts or omissions occurring prior to the effective
date of the merger.
MANAGEMENT AND OPERATIONS AFTER THE MERGER
BOARD OF DIRECTORS. At the effective time of the merger, the members of the
Farmers Board of Directors shall consist of Dennis Angner, Michael McGuire, Dale
Weburg, James Fabiano and David Maness.
MANAGEMENT. Mr. Kedrowski, the current president and chief executive officer of
Farwell, will enter into an employment agreement with Farmers to become a Vice
President of Farmers on the effective date of the merger. Dennis P. Angner, the
current president and chief executive officer of IBT shall also serve as
president and CEO of Farmers, with Timothy Miller, the current president and CEO
of Farmers becoming a Vice President. Following the effective time of the
merger, IBT will form a regional advisory board for the Farwell division of
Farmers consisting of persons living and/or working in the trade area currently
served by Farwell. The regional board will initially be comprised of the
directors of Farwell incumbent immediately preceding the merger.
ARTICLES OF INCORPORATION AND BYLAWS. The certificate of incorporation and
bylaws of Farmers will be the same as the certificate of incorporation and
bylaws of the surviving entity, with the exception that the name of Farmers
shall be changed to FSB.
EFFECTIVE DATE OF MERGER
The parties expect that the merger will be effective during the third quarter of
2006 or as soon as possible after the receipt of all regulatory and shareholder
approvals, the expiration of all regulatory waiting periods and after the
satisfaction of all conditions to the merger set forth in the Merger Agreement.
DISTRIBUTION OF IBT COMMON STOCK
At the effective time of the merger, Farwell's shareholders will cease to own
shares of Farwell. Subject to certain adjustments pursuant to the Merger
Agreement, each share of Farwell common stock issued and outstanding immediately
prior to the completion of the merger will automatically be converted into the
right to receive 3.0382 shares of IBT common stock and $29.00 in cash.
At the effective time of the merger, IBT will deliver to its exchange agent,
Isabella Bank and Trust, the amount of cash and number of shares of IBT common
stock issuable in the merger. Within five business days after the closing of the
merger, the exchange agent will send you and other former Farwell shareholders
transmittal materials to be used to exchange the old Farwell stock certificates.
The transmittal materials will contain instructions with respect to the
surrender of old Farwell stock certificates. After the effective time of the
merger, and once the exchange agent receives your old Farwell stock
certificates, the exchange agent will send you a check for the cash payable in
exchange for your shares of Farwell common stock and will register the shares of
IBT common stock issuable to you in the name and at the address appearing on
Farwell's stock records as of the time of the merger or such other name or
address as you request in the transmittal materials. The exchange agent will not
be required to register the shares in that manner until it has received all of
your old Farwell stock certificates (or an affidavit of loss for such
certificate or certificates and an indemnity bond), together with properly
executed transmittal materials. Such
27
old Farwell stock certificates, transmittal materials, and affidavits must be in
a form and condition reasonably acceptable to IBT and the exchange agent. The
exchange agent will have discretion to determine reasonable rules and procedures
relating to the exchange (or lack thereof) of old Farwell stock certificates and
the payment of the per share merger consideration.
CONDUCT OF BUSINESS PENDING THE MERGER
The Merger Agreement contains various restrictions on the operations of Farwell
before the effective time of the merger. In general, the Merger Agreement
obligates Farwell to conduct its business in the usual, regular and ordinary
course of business and to use reasonable efforts to preserve its business
organization and assets and maintain its rights and franchises. In addition,
Farwell has agreed that, except as expressly contemplated by the Merger
Agreement or specified in a schedule to the Merger Agreement, without the prior
written consent of Farmers, it will not, among other things:
- change or waive any provision of its charter or bylaws, except as required
by law;
- change the number of authorized or issued shares of its capital stock;
- enter into, amend in any material respect or terminate any material
contract or agreement except in the ordinary course of business;
- make application for the opening or closing of any, or open or close any,
branch or automated banking facility, except as required by regulators;
- change compensation or benefits of its employees, except for certain
increases or bonuses subject to limits specified in the Merger Agreement;
- enter into or modify any employee benefit plans relating to any director,
officer or employee, except as may be required by law;
- merge or consolidate with any other corporation or sell or lease all or any
substantial portion of Farwell's assets;
- sell or dispose of the capital stock of Farwell or otherwise dispose of any
assets other than in the ordinary course of business;
- take any action that would cause any of the representations and warranties
contained in the Merger Agreement to be untrue or would fail to cause any
conditions precedent to be satisfied;
- change any method, practice or principle of accounting except as required
by generally accepted accounting principles or any bank regulator;
- waive, release, grant or transfer any material rights of value or modify in
any material respect any existing material agreement or indebtedness, other
than in the ordinary course of business;
- purchase equity securities, or securities for its investment portfolio
inconsistent with current investment policy;
- enter into, review, extend or modify any affiliate transaction (other than
a deposit transaction) other than pursuant to existing insider loan
policies;
- enter into any futures contract, option, interest rate caps, floors or
exchange agreement for purposes of hedging the exposure of interest-earning
assets and interest-bearing liabilities to changes in interest rates,
except in the ordinary course of business;
- take any action that would give rise to a payment to any individual under
any employment agreement;
- change policies with respect to extension of credit, establishment of
reserves, investments, asset/liability management or other material banking
policies;
- take any action that would result in acceleration of the right to payment
under any benefit plan;
- sell any participation interest in any loan;
- enter into any lease or contract other than in the normal course of
business;
28
- pay, discharge, settle or compromise any claim, action, litigation,
arbitration or proceeding in an amount exceeding $10,000;
- incur any capital expenditures in excess of $25,000 individually or in the
aggregate other than pursuant to binding commitments existing on the date
of the Merger Agreement or necessary to maintain existing assets in good
repair; and
- make any new loan or other credit facility commitment to any borrower or
group of affiliated borrowers in excess of $250,000 for a construction
loan, $500,000 for a commercial real estate loan, $250,000 for a commercial
business loan or $500,000 for a residential loan, except for prior
commitments previously disclosed to Farmers and for any loan in excess of
such amount to which Farmers does not object within 24 hours after being
notified of the intent to make the loan.
- sell or dispose of any assets or incur any liability other than in the
ordinary course of business consistent with past practices and policies.
In addition to these covenants, the Merger Agreement contains various other
customary covenants, including, among other things, access to information and
each party's efforts to cause its representations and warranties to be true and
correct on the closing date.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains a number of customary representations and
warranties by Farmers, IBT and Farwell regarding aspects of their respective
businesses, financial condition, structure and other facts pertinent to the
merger that are customary for a transaction of this kind. They include, among
other things:
- the organization, existence, and corporate power and authority, and
capitalization of each of the companies;
- the absence of conflicts between the Merger Agreement and applicable laws
and other documents, contracts and agreements;
- the absence of any development materially adverse to the companies;
- the obtaining of necessary consents;
- the absence of adverse material litigation;
- the accuracy of reports and financial statements of each party;
- the ownership of their respective material assets and properties;
- the existence, performance and legal effect of certain contracts;
- loan portfolio matters;
- compliance with applicable laws;
- the filing of tax returns, payment of taxes and other tax matters by either
party;
- labor and employee benefit matters; and
- compliance with applicable environmental laws by Farwell.
All representations, warranties and covenants of the parties, other than the
covenants in specified sections which relate to continuing matters, terminate
upon the merger.
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CONDITIONS TO THE MERGER
Mutual Conditions to Close
The respective obligations of Farmers and Farwell to complete the merger are
subject to various conditions prior to the merger. The conditions include the
following:
- Each of the Federal Deposit Insurance Corporation and the Office of
Financial and Insurance Services of the State of Michigan approves or
provides its non-objection of the merger and all statutory waiting periods
expire;
- approval of the Merger Agreement by the affirmative vote of 66 2/3% of the
issued and outstanding shares of Farwell;
- the absence of any litigation, statute, law, regulation, order, decree or
injunction by which the merger is restrained or enjoined;
- the registration statement of which this proxy statement prospectus is a
part must have been declared effective by the SEC and must not be subject
to a stop order or threatened stop order;
- Farmers and Farwell must have received a fairness opinion from Austin
Associates LLC to the effect that the terms of the merger are fair to IBT's
and Farwell's shareholders from a financial point of view;
- Farmers and Farwell must have received a tax opinion from Foster, Swift,
Collins & Smith, P.C. to the effect that the merger will qualify as a
reorganization; and
- None of the regulatory approvals shall impose any term, condition or
restriction that Farmers or Farwell in good faith reasonably determines
would so materially adversely affect the transaction as to render
inadvisable in the reasonable good faith judgment of Farmers or Farwell,
the consummation of the merger.
Farmer's Conditions to Close
In addition to the mutual conditions to close described above, Farmer's
obligation to complete the merger is subject to fulfillment of additional
conditions, including the following:
- the representations and warranties made by Farwell in the Merger Agreement
must be true and correct as of the closing date or to a specifically
related earlier date;
- Farwell must have performed in all material respects all of the agreements,
obligations and covenants made in the Merger Agreement to be completed at
or before the effective time;
- all requisite material permits, authorizations, consents, waivers,
clearances or approvals have been obtained;
- the holders of no more than 10% of Farwell's common stock shall have
indicated their intention to seek dissenters' rights of appraisal; and
- Farmers must have received an opinion from Bodman LLP (legal counsel for
Farwell) to the effect that Farwell is in good standing, the merger has
been approved by Farwell's Board of Directors and shareholders, and the
Merger Agreement is binding on Farwell.
Farwell's Conditions to Close
In addition to the mutual conditions to close described above, Farwell's
obligation to complete the merger is subject to the fulfillment of additional
conditions, including the following:
- the representations and warranties made by Farmers and IBT in the Merger
Agreement must be true and correct as of the closing date or to a
specifically related earlier date;
- Farmers and IBT must have performed in all material respects all of the
agreements, obligations and covenants made in the Merger Agreement to be
completed at or before the effective time;
30
- all requisite material permits, authorizations, consents, waivers,
clearances or approvals have been obtained;
- Farwell must have received an opinion from Foster, Swift, Collins & Smith,
P.C. (legal counsel for Farmers and IBT) to the effect that Farmers and IBT
are in good standing, the Merger Agreement has been duly executed by
Farmers and IBT and is binding on Farmers and IBT;
- IBT shall have delivered the merger consideration (IBT stock and cash) to
the exchange agent; and
- Farwell must have received a fairness opinion from Donnelly Penman &
Partners to the effect that the terms of the merger are fair to Farwell's
shareholders from a financial point of view.
REGULATORY APPROVALS REQUIRED FOR THE MERGER
Farwell and Farmers have agreed to use all reasonable efforts to obtain all
permits, consents, approvals and authorizations of all third parties and
governmental entities that are necessary or advisable to consummate the merger.
This includes the approval or non-objection of the Federal Deposit Insurance
Corporation and the Office of Financial and Insurance Services of the State of
Michigan. Farmers has filed the application or notice materials necessary to
obtain these regulatory approvals. The merger cannot be completed without such
approvals and non-objections. Farmers cannot assure that it will obtain the
required regulatory approvals and non-objections, when they will be received, or
whether there will be conditions in the approvals or any litigation challenging
the approvals. Farwell and Farmers also cannot assure that the Federal Deposit
Insurance Corporation will not attempt to challenge the merger on antitrust
grounds, or what the outcome will be if such a challenge is made.
Farwell and Farmers are not aware of any material governmental approvals or
actions that are required prior to the merger other than those described above.
Farwell and Farmers presently contemplate that they will seek any additional
governmental approvals or actions that may be required in addition to those
requests for approval currently pending; however, they cannot assure that they
will obtain any such additional approvals or actions.
NO SOLICITATION
Until the merger is completed or the Merger Agreement is terminated, Farwell has
agreed that it, its officers, directors employees, representatives or agents
will not:
- initiate, solicit or knowingly encourage any inquiries or the making of any
acquisition proposal;
- enter into, maintain or continue any discussions or negotiations regarding
any acquisition proposals; or
- agree to or endorse any other acquisition proposal.
Farwell may, however, furnish information regarding Farwell to, or enter into
and engage in discussion with, any person or entity in response to an
unsolicited proposal by the person or entity relating to an acquisition proposal
if:
- Farwell's Board of Directors determines in good faith that such proposal,
if consummated, is reasonably likely to result in a transaction more
favorable from a financial point-of-view to Farwell's shareholders than the
Farmers' merger;
- Farwell's Board of Directors determines in good faith, after consultation
with its legal counsel and financial advisors, that the action is required
for Farwell's directors to comply with their fiduciary obligations under
applicable law; and
- Farwell promptly notifies Farmers of such inquiries, proposals or offers,
the material terms of such inquiries, proposals or offers and the identity
of the person making such inquiry, proposal or offer.
TERMINATION; AMENDMENT; WAIVER
The Merger Agreement may be terminated prior to the closing, before or after
approval by Farwell's shareholders, as follows:
- by mutual written agreement of Farmers and Farwell;
- by Farmers or Farwell if Farwell shareholders do not approve the Merger
Agreement and merger;
31
- by a non-breaching party if the other party (1) materially breaches any
covenants or undertakings contained in the Merger Agreement or (2)
materially breaches any representations or warranties contained in the
Merger Agreement, in each case if such breach by its nature cannot be cured
prior to December 31, 2006 or has not been cured within thirty days after
written notice from the terminating party;
- by either party if any required regulatory approvals for consummation of
the merger is not obtained;
- by either party if the closing does not occur by December 31, 2006;
- by either party if any condition to closing cannot be satisfied or
fulfilled by December 31, 2006;
- by Farmers if Farwell shall have received a superior proposal and Farwell
Board of Directors shall have entered into an acquisition agreement with
respect to a superior proposal and terminates the Merger Agreement or fails
to recommend that the shareholders of Farwell approve the Merger Agreement
or has withdrawn, modified or changed such recommendation in a manner which
is adverse to Farmers; or
- by Farwell in order to accept a "superior proposal," as defined in the
Merger Agreement, which has been received and considered by Farwell in
compliance with the applicable terms of the Merger Agreement, provided that
Farwell has notified Farmers at least five business days in advance of any
such action and given Farmers the opportunity during such period, if
Farmers elects in its sole discretion, to negotiate amendments to the
Merger Agreement which would permit Farwell to proceed with the proposed
merger with Farmers.
FEES AND EXPENSES
Each party will each pay its own costs and expenses in connection with the
Merger Agreement and the transactions contemplated thereby; provided, however,
if the merger is not consummated due to the failure to obtain any necessary
regulatory approval, Farmers shall reimburse Farwell for its actual costs and
expenses incurred by Farwell after March 9, 2006 in connection with the Merger
Agreement and the transactions contemplated thereby.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion addresses the material United States federal income tax
consequences of the merger to holders of Farwell common stock. This discussion
applies only to Farwell shareholders who hold their Farwell common stock as a
capital asset within the meaning of Section 1221 of the Internal Revenue Code.
Further, this discussion does not address all aspects of United States federal
income taxation that may be relevant to a particular shareholder in light of his
or her personal circumstances or to shareholders subject to special treatment
under the United States federal income tax laws, including: banks or trusts;
tax-exempt organizations; insurance companies; regulated investment companies or
mutual funds; dealers in securities or foreign currency; traders in securities
who elect to apply a mark-to-market method of accounting; pass-through entities
and investors in such entities; foreign persons; and shareholders who hold
Farwell common stock as part of a hedge, straddle, constructive sale, conversion
transaction or other integrated instrument; and shareholders of Farwell common
stock who acquired their shares of Farwell common stock upon the exercise of
warrants or employee stock options or otherwise as compensation.
This discussion is based on the Internal Revenue Code, Treasury regulations,
administrative rulings and judicial decisions, all as currently applicable, and
all of which are subject to change (possibly with retroactive effect) and to
differing interpretations. Tax considerations under state, local and foreign
laws are not addressed in this document. Tax consequences to you may vary
depending upon your particular circumstances. Therefore, you should consult your
tax advisor to determine the particular tax consequences of the merger to you,
including those relating to state and/or local taxes.
No ruling has been, or will be, sought from the Internal Revenue Service
concerning tax issues with respect to the merger. It is a condition to the
obligations of Farmers and Farwell to complete the merger that they receive from
Foster, Swift, Collins & Smith, P.C., legal counsel for Farmers and IBT, an
opinion regarding the material federal income tax consequences of the merger
which concludes that the tax consequences of the merger will be substantially
identical to those described in this proxy statement-prospectus.
Based on representations contained in letters provided by IBT and Farwell and on
certain customary factual assumptions, all of which must continue to be true and
accurate in all material respects as of the effective time of the merger, it is
the opinion of Foster, Swift, Collins & Smith, P.C., counsel to Farmers and IBT,
that the material United States federal income tax consequences of the merger
are expected to be as follows:
32
- the merger will qualify as a "reorganization" within the meaning of Section
368(a) of the Internal Revenue Code and Farmers, Farwell and IBT will each
be a "party to a reorganization" within the meaning of Section 368(b);
- no gain or loss will be recognized by IBT, its subsidiaries or Farwell by
reason of the merger; and
- the tax consequences to Farwell shareholders will be as described in detail
below.
The tax opinion neither binds nor precludes the Internal Revenue Service from
adopting a contrary position. An opinion has no binding effect or official
status of any kind and no assurance can be given that contrary positions will
not be successfully asserted by the Internal Revenue Service or adopted by a
court if the issues are litigated. Accordingly, you are strongly urged to
consult with your tax advisor to determine the particular United States federal,
state, local or foreign income or other tax consequences of the merger to you.
EXCHANGE FOR CASH AND IBT COMMON STOCK
As a result of receiving a combination of cash and IBT common stock in exchange
for shares of Farwell common stock, a Farwell shareholder will recognize gain,
but not loss, equal to the lesser of (1) the amount of cash received or (2) the
amount of gain "realized" in the merger. The amount of gain a Farwell
shareholder "realizes" will equal the amount by which (a) the cash plus the fair
market value at the effective time of the merger of the IBT common stock
received exceeds (b) the shareholder's tax basis in Farwell common stock
surrendered in the merger. If a shareholder of Farwell common stock purchased
his or her shares of Farwell common stock at different prices, such Farwell
shareholder will have to compute his or her recognized gain or loss separately
for the shares of Farwell common stock with different adjusted basis in
accordance with the rules described in the previous sentence. Any recognized
gain would be taxed as a capital gain or a dividend, as described below. The tax
basis of the IBT common stock received in the merger will be the same as the tax
basis of the shares of Farwell common stock surrendered in the merger decreased
by the amount of cash received in the merger and increased by the (i) gain
recognized in the merger, if any and (ii) dividend income recognized in the
merger, if any. The holding period for shares of IBT common stock received by a
Farwell shareholder will include such shareholder's holding period for the
Farwell common stock surrendered in exchange for the IBT common stock, provided
that such shares of Farwell common stock were held as capital assets of the
shareholder at the effective time of the merger.
In certain circumstances, a Farwell shareholder may receive dividend or ordinary
income treatment, rather than capital gain treatment on all or a portion of the
gain recognized in the merger if receipt of the cash portion of the merger
consideration has the effect of the distribution of a dividend under the
principles of Section 302 of the Internal Revenue Code. The determination of
whether a cash payment has such effect is based on a comparison of the Farwell
shareholder's proportionate interest in IBT after the merger with the
proportionate interest the Farwell shareholder would have had if the shareholder
had received solely IBT common stock in the merger. For purposes of this
comparison, the Farwell shareholder may constructively own shares of IBT held by
certain members of the Farwell shareholder's family or certain entities in which
the Farwell shareholder has an ownership or beneficial interest and certain
stock options may be aggregated with the Farwell shareholder's shares of IBT
common stock. The amount of the cash payment that may be treated as a dividend
is limited to the shareholder's ratable share of the accumulated earnings and
profits of Farwell at the effective time of the merger. Any gain that is not
treated as a dividend will be taxed as a capital gain, provided that the Farwell
shareholder's common stock was held as a capital asset at the time of the
merger. Capital gain or loss recognized by a Farwell shareholder in the merger
will be long-term capital gain or loss if the holding period of the shares of
Farwell common stock exceeds one year at the completion of the merger. In the
case of individuals, the maximum federal income tax rate applicable to long-term
capital gains generally is 15%. If a Farwell shareholder has to recognize
ordinary income, such income for individuals is currently taxed at the maximum
rate of 15% if treated as dividend or 35% if treated as other ordinary income.
The determination of whether a cash payment will be treated as having the effect
of a dividend depends primarily upon the facts and circumstances of each Farwell
shareholder. Farwell shareholders are urged to consult their own tax advisors
regarding the tax treatment of the cash received in the merger.
A Farwell shareholder who holds Farwell common stock as a capital asset and who
receives in the merger, in exchange for such stock, cash in lieu of a fractional
share interest in IBT common stock, will be treated as having received such cash
in full payment for such fractional share of stock and as capital gain or loss,
notwithstanding the dividend rules discussed above.
Unless an exemption applies under the backup withholding rules of Section 3406
of the Internal Revenue Code, the Exchange Agent is required to withhold, and
will withhold, 28% of any cash payments to which a Farwell shareholder is
entitled pursuant to the merger, unless the Farwell shareholder provides the
appropriate form. A Farwell shareholder should complete and sign the substitute
Internal Revenue Service Form W-9 enclosed with the letter of transmittal sent
by Isabella Bank and Trust. This completed form provides the information,
including the Farwell shareholder's taxpayer identification number (a social
security number for individuals), and certification necessary to avoid backup
withholding.
33
The foregoing is a summary discussion of material federal income tax
consequences of the merger. The discussion is included for general information
purposes only and may not apply to a particular Farwell shareholder in light of
such shareholder's particular circumstances. Farwell shareholders should consult
their own tax advisors as to the particular tax consequences to them of the
merger, including the application of state, local and foreign tax laws and
possible future changes in federal income tax laws and the interpretation
thereof, which can have retroactive effects.
DISSENTING SHAREHOLDERS. Holders of Farwell common stock who dissent with
respect to the merger as discussed in "Dissenters' Rights" and who receive cash
in respect of their shares of Farwell common stock will recognize capital gain
or loss equal to the difference between the amount of cash received and their
aggregate tax basis in their shares.
HOLDING IBT COMMON STOCK. The following discussion describes the U.S. federal
income tax consequences to a holder of IBT common stock after the merger. Any
cash distribution paid by IBT out of earnings and profits, as determined under
U.S. federal income tax law, will be subject to tax as ordinary dividend income
and will be includible in your gross income in accordance with your method of
accounting. See below under "Tax Rate Changes" for information regarding the
rate of tax on dividends. Cash distributions paid by IBT in excess of its
earnings and profits will be treated as (i) a tax-free return of capital to the
extent of your adjusted basis in your IBT common stock (reducing such adjusted
basis, but not below zero), and (ii) thereafter as gain from the sale or
exchange of a capital asset.
Upon the sale, exchange or other disposition of IBT common stock, you will
generally recognize gain or loss equal to the difference between the amount
realized upon the disposition and your adjusted tax basis in the shares of IBT
common stock surrendered. Any such gain or loss generally will be long-term
capital gain or loss if your holding period with respect to the IBT common stock
surrendered is more than one year at the time of the disposition. For the rate
of tax on capital gains, see below under "Tax Rate Changes."
TAX RATE CHANGES. Under the Jobs and Growth Tax Relief Reconciliation Act of
2003, the individual tax rates on long-term capital gains and dividend income
have been reduced. The top individual rate for long-term capital gains from
sales or exchanges on or after May 6, 2003 is 15%. The top individual rate for
"qualified dividend income" received after December 31, 2002 is also 15%. To be
considered "qualified dividend income" to a particular holder, the holder must
have held the common stock for more than 60 days during the 120 day period
beginning 60 days before the ex-dividend period as measured under section 246(a)
of the Internal Revenue Code. Dividend income that is not qualified dividend
income will be taxed at ordinary income rates. You are urged to consult your tax
advisor to determine whether a dividend, if any, would be treated as qualified
dividend income.
LIMITATIONS ON TAX OPINION AND DISCUSSION. As noted earlier, the tax opinion is
subject to certain assumptions, relating to, among other things, the truth and
accuracy of certain representations made by IBT and Farwell, and the
consummation of the merger in accordance with the terms of the Merger Agreement
and applicable state law. Furthermore, the tax opinion will not bind the
Internal Revenue Service and, therefore, the IRS is not precluded from asserting
a contrary position. The tax opinion and this discussion are based on currently
existing provisions of the Internal Revenue Code, existing and proposed Treasury
regulations, and current administrative rulings and court decisions. There can
be no assurance that future legislative, judicial, or administrative changes or
interpretations will not adversely affect the accuracy of the tax opinion or of
the statements and conclusions set forth herein. Any such changes or
interpretations could be applied retroactively and could affect the tax
consequences of the merger.
THE PRECEDING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF MATERIAL UNITED STATES
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER. IT IS NOT A COMPLETE ANALYSIS OR
DISCUSSION OF ALL POTENTIAL TAX EFFECTS THAT MAY BE IMPORTANT TO YOU. THUS, WE
URGE FARWELL SHAREHOLDERS TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC
TAX CONSEQUENCES TO THEM RESULTING FROM THE MERGER, INCLUDING TAX RETURN
REPORTING REQUIREMENTS, THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL,
AND OTHER APPLICABLE TAX LAWS AND THE EFFECT OF ANY PROPOSED CHANGES IN THE TAX
LAWS.
RESALE OF IBT COMMON STOCK
All shares of IBT common stock received by Farwell shareholders in the merger
will be registered under the Securities Act of 1933 and will be freely
transferable under the Securities Act of 1933, except that shares of IBT common
stock received by persons who are deemed to be "affiliates," as the term is
defined under the Securities Act of 1933, of IBT or Farwell at the time of the
special meeting may be resold by them only in transactions permitted by the
resale provisions of Rule 145 under the Securities Act of 1933 or as otherwise
permitted under the Securities Act of 1933. Persons who may be deemed to be
affiliates of IBT or Farwell generally include individuals or entities that
control, are controlled by, or are under common control with, the party and may
include certain officers and directors of such party as well as principal
shareholders of such party. Affiliates of both parties have previously been
notified of their status. The Merger Agreement requires Farwell to use
reasonable efforts to receive an affiliate letter from each person who is an
affiliate of Farwell.
This proxy statement-prospectus does not cover resales of IBT common stock
received by any person who may be deemed to be an affiliate of Farwell or IBT.
34
ACCOUNTING TREATMENT
In accordance with accounting principles generally accepted in the United States
of America, the merger will be accounted for using the purchase method. As a
result, the recorded assets and liabilities of IBT will be carried forward at
their recorded amounts, the historical operating results will be unchanged for
the prior periods being reported on and the assets and liabilities from the
acquisition of Farwell will be adjusted to fair value at the date of the merger.
In addition, all identified intangibles, which presently consists of a core
deposit intangible, will be recorded at fair value and included as part of the
net assets acquired. To the extent that the purchase price payable to former
Farwell shareholders exceeds the fair value of the net assets including
identifiable intangibles of Farwell at the merger date, that amount will be
reported as goodwill. In accordance with Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," goodwill will not be
amortized but will be evaluated for impairment annually. Identified intangibles
will be amortized over their estimated lives. Further, the purchase accounting
method results in the operating results of Farwell being included in the
consolidated income of IBT beginning from the date of consummation of the
merger.
DISSENTERS' RIGHTS
Under Michigan banking law, shareholders of Farwell have the right to dissent
from the merger and to receive payment in cash for the fair value of their
shares of Farwell common stock. Farwell shareholders electing to do so must
comply with the provisions of Section 3706(2)(b) of the Michigan Banking Code of
1999 in order to perfect their dissenters' rights. A copy of the applicable
Michigan statute is attached as Appendix D of this document.
ENSURING PERFECTION OF DISSENTERS' RIGHTS CAN BE COMPLICATED. THE PROCEDURAL
RULES ARE SPECIFIC AND MUST BE FOLLOWED PRECISELY. A FARWELL SHAREHOLDER'S
FAILURE TO COMPLY WITH THESE PROCEDURAL RULES MAY RESULT IN HIS OR HER BECOMING
INELIGIBLE TO PURSUE DISSENTERS' RIGHTS.
The following is intended as a brief summary of the material provisions of the
Michigan statutory procedures that a Farwell shareholder must follow in order to
dissent from the merger and obtain payment of the fair value of his or her
shares of Farwell common stock. This summary, however, is not a complete
statement of all applicable requirements and is qualified in its entirety by
reference to Section 3706(2)(b) of the Michigan Banking Code of 1999, the full
text of which appears in Appendix D of this document.
Under Section 3706(2)(b), a shareholder of Farwell who votes against the merger,
or who has given notice in writing to Farwell at or before the meeting called
for the purpose of considering the Merger Agreement that the shareholder
dissents from the merger, is entitled to receive in cash from Farmers the fair
value of all shares held by the shareholder, if and when the merger is
consummated, upon written request made to Farmers at any time within 30 days
after the date of consummation of the merger, accompanied by the surrender of
the stock voted in dissent by the shareholder. Upon the filing of the written
request and the surrender of stock certificates, if any, the shareholder shall
cease to have any of the rights of a shareholder except the right to be paid the
fair value of the shareholder's shares. The request having been made shall not
be withdrawn except with the written consent of Farmers.
The fair value of the shares shall be determined, as of the date on which the
meeting of Farwell shareholders was held adopting the Merger Agreement, by a
qualified and independent appraiser selected by the Commissioner of the Office
of Financial and Insurance Services upon written request submitted by a
dissenting shareholder entitled to receive the fair value of his or her shares.
The appraiser selected shall file a written appraisal with the Commissioner, who
in turn shall forward copies to all interested parties. The valuation determined
by the appraiser is final and binding on all parties as to the fair value of the
shares. Farmers shall pay to each dissenting shareholder entitled the fair value
of his or her shares within 30 days following the receipt of the written
appraisal. The fees and expenses of the appraisal, which shall be approved by
the Commissioner, shall be paid by Farmers.
If you are a Farwell shareholder who elects to exercise dissenters' rights, you
should mail or deliver a written demand to: The Farwell State Savings Bank, 399
West Main Street, Farwell, Michigan, 48622, Attention: Dean L. Beavers,
Corporate Secretary.
IF YOU FAIL TO COMPLY STRICTLY WITH THE PROCEDURES DESCRIBED ABOVE YOU WILL LOSE
YOUR DISSENTERS' RIGHTS. CONSEQUENTLY, IF YOU WISH TO EXERCISE YOUR DISSENTERS'
RIGHTS, WE STRONGLY URGE YOU TO CONSULT A LEGAL ADVISOR BEFORE ATTEMPTING TO
EXERCISE YOUR DISSENTERS' RIGHTS.
STOCK TRADING AND DIVIDEND INFORMATION
There is no established public trading market for Farwell common stock. It is
Farwell's established practice to pay annual cash dividends. Farwell paid cash
dividends of $3.25 and $13.25 per share in 2003 and 2004, respectively, and
Farwell paid a cash dividend of $11.00 per share in 2005. As of _______________,
2006, there were __________ shares of Farwell common stock issued and
outstanding, and approximately _____ shareholders of record.
35
GENERAL
IBT is incorporated under the Michigan Business Corporation Act. Farwell is
incorporated under the predecessor to the Michigan Banking Code of 1999.
Accordingly, the rights of IBT shareholders are governed by the corporate laws
of the State of Michigan and the rights of Farwell shareholders are governed by
the banking laws of the State of Michigan. As a result of the merger, Farwell
shareholders will become shareholders of IBT. Thus, following the merger, the
rights of Farwell shareholders who become IBT shareholders in the merger will be
governed by the general corporate laws of the State of Michigan and by the IBT
articles of incorporation and bylaws. IBT's articles of incorporation and bylaws
will be unaltered by the merger.
COMPARISON OF SHAREHOLDERS' RIGHTS
Set forth on the following pages is a summary comparison of the rights of an IBT
shareholder under the IBT articles of incorporation, the IBT bylaws, and
Michigan corporate law (right column) and the rights of a shareholder under the
Farwell Articles of Incorporation, the Farwell bylaws and Michigan banking law
(left column). The summary set forth below is not intended to provide a
comprehensive summary of Michigan corporate and banking law or of each company's
governing documents. This summary is qualified in its entirety by reference to
the full text of the IBT articles of incorporation and IBT bylaws, and the
Farwell Charter and Farwell bylaws.
FARWELL IBT
------- ---
AUTHORIZED CAPITAL
262,500 shares of common stock, par value 10,000,000 shares of common stock no par
$10.00 per share. As of March 31, 2006, value. As of March 31, 2006, there were
there were 262,500 shares of Farwell common 5,484,325 shares of IBT common stock
stock issued and outstanding. issued and outstanding.
NUMBER OF DIRECTORS
The bylaws of Farwell fix the required The bylaws of IBT fix the required number
number of directors at not less than 5 nor of directors at not less than five, with
more than 8 members. At each annual the actual number determined by the Board
meeting, within the foregoing limitation, of Directors. There are currently eleven
the shareholders of Farwell designate the directors in office. The corporation's
number of directors that are to be elected bylaws require that a majority of
for the ensuing year. There are currently directors shall consist of individuals who
six directors in office. are not employees of the corporation or an
affiliated entity.
VACANCIES AND NEWLY CREATED DIRECTORSHIPS
Vacancies occurring in the board may be Filled by a vote of the directors then in
filled for the current year by appointment office. The person who fills any such
made by the remaining directors; however, vacancy holds office until the next
when a vacancy reduces the number of election of the class for which the
directors below 5, the remaining directors director shall have been chosen.
must promptly fill such vacancy in order to
maintain a minimum of 5 directors.
SPECIAL MEETING OF THE BOARD
Special meetings of the Board of Directors Special meetings of the Board of Directors
may be called by the President, may be called by the president or by the
Vice-President, or Cashier at any time by written request of at least three
telephone, telegram or letter. directors as long as twenty-four hours
notice is given to each director.
SPECIAL MEETING OF SHAREHOLDERS
Special meetings of the shareholders may be Special meetings of the shareholders may
called for any purpose at any time by the be called by the President or Secretary,
Board of Directors or by holders of at and shall be called by either of them on
least 10% of the then outstanding shares of the request, in writing or by vote, of a
any class of shares. majority of the directors or by the
holders of
36
FARWELL IBT
------- ---
Notice of the meeting must be sent at least a majority of the shares of
first-class mail, not less than 10 days common stock issued and outstanding.
before the date of the meeting, to all
shareholders of record entitled to act and
vote at the meeting, stating the purpose of
the meeting.
CUMULATIVE VOTING
No cumulative voting for election of No cumulative voting for election of
directors is provided for shareholders of directors is provided for shareholders of
Farwell. IBT
CLASSES OF DIRECTORS
The bylaws and articles of incorporation of The bylaws of IBT provide that the Board
Farwell do not provide for classes of of Directors shall be divided into three
directors. The shareholders elect the classes, with the term of one class of
entire Board of Directors at each annual directors expiring each year.
meeting for the ensuing year. Consequently, directors of a particular
class are elected to a three-year term.
REMOVAL OF DIRECTORS
The bylaws and articles of incorporation of IBT's articles of incorporation provide
Farwell are silent on removal of directors. that a director may be removed from office
However, Section 3505 of the Michigan only for "cause" by a majority of voting
Banking Code of 1999 provides the Farwell shares entitled to vote at an election of
shareholders may remove one or more directors.
directors with or without cause by a
majority of shares entitled to vote at an
election of directors.
RETIREMENT OF DIRECTORS
The bylaws and articles of incorporation of A member of the Board of Directors must
Farwell are silent on mandatory retirement retire from the board at the completion of
of directors. the month in which he or she attains 70
years of age.
STATE ANTI-TAKEOVER PROVISIONS
Farwell is not subject to any state Fair Price Act. Certain provisions of the
anti-takeover provisions. Michigan Business Corporation Act,
referred to as the Fair Price Act,
establish a statutory scheme similar to
the supermajority and fair price
provisions found in many corporate
charters. The Fair Price Act provides that
a supermajority vote of 90% of the
shareholders and no less than two-thirds
of the votes of noninterested shareholders
must approve a "business combination." The
Fair Price Act defines a "business
combination" to include nearly any merger,
consolidation, share exchange, sale of
assets, stock issuance, liquidation, or
reclassification of securities involving
an "interested shareholder" or certain
"affiliates" of an interested shareholder.
An "interested shareholder" is generally
any person who owns 10% or more of the
outstanding voting shares of the
corporation. An "affiliate" is a person
who directly or indirectly controls, is
controlled by, or is under common control
with a specified person.
Control Share Act. Certain portions of the
Michigan Business Corporation Act,
referred to as the Control Share Act, also
regulate the acquisition of "control
shares" of widely held Michigan
corporations. The Control Share Act
establishes procedures governing "control
share acquisitions." A control share
acquisition is defined as an acquisition
of shares by an acquiror which, when
combined with other shares held by that
person or entity, would
37
FARWELL IBT
------- ---
give the acquiror voting power in the
election of directors of the corporation
at or above any of the following
thresholds: 20%, 33% and 50%. Under the
Control Share Act, an acquiror may not
vote "control shares" that were acquired
in a control share acquisition unless the
corporation's disinterested shareholders
(defined to exclude the acquiring person,
officers of the target corporation and
directors of the target corporation who
are also employees of the corporation)
vote to confer voting rights on the
control shares. The Control Share Act does
not affect the voting rights of shares
owned by an acquiring person before the
control share acquisition. The Control
Share Act entitles corporations to redeem
control shares from the acquiring person
under certain circumstances. In other
cases, the Control Share Act confers
dissenters' rights upon all of a
corporation's shareholders except the
acquiring person.
SUPER-MAJORITY VOTE ON CERTAIN BUSINESS COMBINATIONS
Section 3701 of the Michigan Banking Code The articles of incorporation of IBT have
of 1999 requires the approval by not less a super-majority vote on certain business
than 2/3 of Farwell shareholders of a combinations, including a merger. A vote
consolidation or merger. of 66 2/3% of all outstanding voting
shares must be voted affirmatively on such
business combination.
CONSENT ACTION BY SHAREHOLDERS
Farwell shareholders are not authorized to Under IBT's articles of incorporation, IBT
take action by written consent in lieu of a shareholders are entitled to take action
meeting. without a meeting if the minimum number of
voting shares required to approve such
action consent to taking such action in
writing.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The bylaws and articles of incorporation of The articles of incorporation of IBT
Farwell are silent on indemnification of provide for indemnification of its
directors and officers. In addition, the directors, officers, employees and agents
Michigan Banking Code of 1999 does not to the fullest extent permitted by
address the issue. Michigan law. Michigan law generally
provides for indemnification against
liability incurred because a person is a
director, officer, employee or agent if
that individual acted in good faith and in
a manner he or she reasonably believed to
be in or not opposed to the best interests
of the corporation or its shareholders;
and, with respect to any criminal action
or proceeding, had no reasonable cause to
believe his or her conduct was unlawful.
If an indemnified individual is successful
in defense of any such action, the
corporation shall indemnify such director
or officer for expenses actually and
reasonably incurred in connection with
such action.
DIRECTOR LIMITATION OF LIABILITY
Section 3504 of the Michigan Banking Code The articles of incorporation of IBT
of 1999 states that a bank's articles of provide that a director shall not be
incorporation may provide that a director personally liable to the corporation or
is not personally liable for monetary its shareholders for monetary damages for
damages due to a director's breach of a a breach of the director's fiduciary duty.
fiduciary duty, subject to certain However, limitation of liability
limitations. However, the articles of protection will not be provided to a
incorporation of Farwell do not grant the director for any breach of the duty of
directors this limitation of liability. loyalty to the corporation or its
shareholders, for acts or omissions not in
good faith or which involve intentional
misconduct or a knowing violation of law,
liability under Section 551(1) of the
Michigan Business
38
FARWELL IBT
------- ---
Corporation Act, or for any transaction
from which the director derived an
improper personal benefit.
AMENDMENTS TO GOVERNING INSTRUMENTS
Section 3203 of the Michigan Banking Code The articles of incorporation of IBT can
of 1999 states that the articles of be amended by the affirmative vote of the
incorporation of Farwell may be amended by holders of 66 2/3% of the outstanding
the affirmative vote of a majority of shares. Under the bylaws of IBT, the
shareholders owning voting shares and with bylaws may be amended by a two-thirds vote
the approval of the commissioner of the of the Board of Directors or by a majority
Michigan Office of Financial and Insurance vote of shares in attendance at a duly
Services. The bylaws of Farwell may be called meeting. However, any amendment
amended by a 2/3 affirmative vote of the that relates to the classified board
Board of Directors at any regular meeting provisions of the bylaws requires the
or special meeting called for that purpose, approval of holders of a majority of
upon prior notice of the proposed action. outstanding shares.
PREEMPTIVE RIGHTS
Neither Farwell's charter nor IBT's articles of incorporation provide for
preemptive rights.
DESCRIPTION OF CAPITAL STOCK OF IBT
IBT is authorized to issue 10,000,000 shares of common stock, no par value. IBT
is not authorized to issue any shares of preferred stock. At March 31, 2006,
there were 5,484,325 shares of IBT common stock issued and outstanding. Each
share of IBT common stock has the same relative rights as, and is identical in
all respects with, each other share of common stock.
The common stock of IBT is not an account of an insurable type, and is not
insured by the Federal Deposit Insurance Corporation or any other government
agency.
COMMON STOCK
DIVIDENDS. The holders of common stock of IBT are entitled to receive and share
equally in dividends as may be declared by the Board of Directors of IBT out of
funds legally available for the payment of dividends. The payment of dividends
by IBT is subject to limitations that are imposed by law and applicable
regulation.
VOTING RIGHTS. The holders of common stock of IBT have exclusive voting rights
in IBT. They elect IBT's Board of Directors and act on other matters as are
required to be presented to them under Michigan law or as are otherwise
presented to them by the Board of Directors. Generally, each holder of common
stock is entitled to one vote per share and does not have any right to cumulate
votes in the election of directors. No vote of IBT shareholders is required for
approval of the merger or Merger Agreement under Michigan law.
LIQUIDATION. In the event of liquidation, dissolution or winding up of IBT, the
holders of its common stock would be entitled to receive, after payment or
provision for payment of all its debts and liabilities, all of the assets of IBT
available for distribution.
PREEMPTIVE RIGHTS. Holders of the common stock of IBT are not entitled to
preemptive rights with respect to any shares that may be issued. The common
stock is not subject to redemption.
The transfer agent for IBT common stock is Isabella Bank and Trust.
CERTAIN PROVISIONS OF THE IBT
ARTICLES OF INCORPORATION AND BYLAWS
The following discussion is a general summary of the material provisions of
IBT's articles of incorporation and bylaws and certain other regulatory
provisions that may be deemed to have an "anti-takeover" effect. The following
description of certain of these provisions is necessarily general and, with
respect to provisions contained in IBT's articles of incorporation and bylaws,
reference should be made in each case to the document in question.
39
relating to corporate governance and rights of shareholders, that might
discourage future takeover attempts. As a result, shareholders who might desire
to participate in such transactions may not have an opportunity to do so. In
addition, these provisions will also render the removal of the Board of
Directors or management of IBT more difficult.
The following description is a summary of the provisions of the articles of
incorporation and bylaws. See "Where You Can Find More Information" as to how to
review a copy of these documents.
RESTRICTIONS ON CALL OF SPECIAL MEETINGS. The bylaws provide that special
meetings of shareholders can be called only by the President or the Secretary,
or by either of them on the request in writing or by vote of a majority of
directors or holders of at least a majority of the shares of capital stock of
IBT issued and outstanding.
PROHIBITION OF CUMULATIVE VOTING. The articles of incorporation prohibit
cumulative voting for the election of directors.
AUTHORIZED BUT UNISSUED SHARES. IBT has authorized but unissued shares of common
stock. See "Description of Capital Stock of IBT". The articles of incorporation
authorize ten million (10,000,000) shares of common stock, no par value. As of
March 31, 2006, there were 5,484,325 shares of IBT common stock issued and
outstanding.
AMENDMENTS TO ARTICLES OF INCORPORATION AND BYLAWS. Amendments to the articles
of incorporation must be approved by 66 2/3% of the outstanding shares of IBT's
voting stock. The bylaws may be amended by a two-thirds vote of the directors of
IBT or the affirmative vote of a majority of shares in attendance at a duly
constituted meeting of shareholders. However, any amendment that relates to the
classified board provisions of the bylaws requires the approval of holders of a
majority of outstanding shares.
CLASSIFIED BOARD OF DIRECTORS. The IBT Board of Directors is divided into three
classes, with the directors in each class being elected for a term of three
years.
"FOR CAUSE" REMOVAL OF DIRECTORS. Directors of IBT may be removed from office at
any time, but only for cause by the affirmative vote of the holders of a
majority of the shares of IBT common stock entitled to vote thereon.
EXPERTS
The consolidated financial statements of IBT as of December 31, 2005 and 2004,
and for each of the years in the three-year period ended December 31, 2005, have
been incorporated by reference into this proxy statement-prospectus herein in
reliance upon the report of Rehmann Robson, P.C., independent registered public
accountants, which report is incorporated by reference herein, and upon the
authority of such firm as experts in accounting and auditing.
The financial statements of Farwell as of December 31, 2005 and for the year
then ended, which are included in this proxy statement-prospectus, include the
report of Rehmann Robson, P.C. independent registered public accountants and are
included in this document in reliance upon such report given on the authority of
said firm as experts in accounting and auditing.
The financial statements of Farwell as of December 31, 2004 and for each of the
two years then ended are unaudited.
LEGAL OPINIONS
The validity of the common stock to be issued in and the United States federal
income tax consequences of, the merger transaction will be passed upon by
Foster, Swift, Collins & Smith, P.C., Lansing, Michigan, counsel to Farmers and
IBT.
ADJOURNMENT OF THE SPECIAL MEETING
In the event that there are not sufficient votes to constitute a quorum or
approve the adoption of the Merger Agreement at the time of the special meeting,
the Merger Agreement may not be approved unless the special meeting is adjourned
to a later date or dates in order to permit further solicitation of proxies. If
it is necessary to adjourn the special meeting, no notice of the adjourned
special meeting is required to be given to shareholders (unless a new record
date is fixed), other than an announcement at the special meeting of the hour,
date and place to which the special meeting is adjourned.
40
CERTAIN BENEFICIAL OWNERS OF
FARWELL COMMON STOCK
The following table sets forth, to the best knowledge and belief of Farwell,
certain information regarding the beneficial ownership of Farwell common stock
as of March 31, 2006, by (i) each person known to Farwell to be the beneficial
owner of more than 5% of the Farwell common stock; (ii) each director and
certain named executive officers of Farwell; and (iii) all of Farwell's
directors and executive officers as a group.
NUMBER OF SHARES PERCENT OF ALL
OF COMMON STOCK COMMON STOCK
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED STOCK OUTSTANDING
------------------------ ------------------ -----------------
FIVE PERCENT OR MORE OWNERS
Warren L. McGuire 66,365 25.3%
Farwell ESOP 26,582 10.1%
Francis Schofield, Trust 18,887 7.2%
Pauline Scheer 17,396 6.6%
DIRECTORS AND EXECUTIVE OFFICERS
Warren L. McGuire, Director 66,365 25.3%
Herbert Miller, Director** 4,400 1.7%
W. Michael McGuire, Director 1,718 *
Thomas Kedrowski, Director/President** 1,600 *
Larry Schofield, Director 867 *
Dean Beavers, Director/Senior Vice President 475 *
Melody Darnell, Vice President 60 *
All directors and executive officers as a group (7) persons 75,485 28.8%
* Less than 1%
** Trustees of the ESOP who vote ESOP shares.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined balance sheet and income
statement give effect to the merger. This pro forma financial information is
based on the historical consolidated financial statements of IBT and Farwell
under the assumptions, and including the adjustments, set forth in the
accompanying notes to unaudited pro forma condensed combined financial
statements. The unaudited pro forma condensed combined balance sheet presents
combined financial information as of March 31, 2006, and the unaudited pro forma
consolidated condensed combined statement of income presents combined financial
information for the three-month period ended March 31, 2006, and for the year
ended December 31, 2005. The unaudited pro forma consolidated condensed combined
balance sheet assumes the merger was consummated on March 31, 2006, and the
unaudited pro forma condensed combined statements of income give effect to the
merger as if the merger occurred at the beginning of each period covered by such
statements of income. Pro forma per share amounts are based on total merger
consideration of $145 per share of Farwell common stock. The actual amount of
total merger consideration is subject to certain possible adjustments pursuant
to the Merger Agreement.
The unaudited pro forma condensed combined financial statements reflect the
restructuring and other merger related expenses disclosed in the notes to such
statements but do not reflect anticipated cost savings. As a result of this and
other factors, the pro forma combined financial condition and results of
operations of IBT as of and after the effective time of the merger may not be
indicative of the results that actually would have occurred if the merger had
been in effect during the periods presented or of the results that may be
attained in the future.
This pro forma financial information should be read in conjunction with the
historical financial statements of IBT consolidated and Farwell, including the
respective notes to those financial statements that are included or incorporated
by reference in this proxy statement-prospectus, and in conjunction with the pro
forma financial data appearing elsewhere in this proxy statement-prospectus. See
"Where You Can Find More Information" on page __.
41
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET (A)
AS OF MARCH 31, 2006
(DOLLARS IN THOUSANDS)
PRO FORMA
IBT BANCORP FARWELL --------------------------
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
----------- ---------- ----------- --------
ASSETS
Cash and due from banks $ 30,619 $ 1,818 $ -- $ 32,437
Federal funds sold -- 5,429 -- 5,429
-------- ------- ------- --------
CASH AND CASH EQUIVALENTS 30,619 7,247 -- 37,866
Securities available for sale 200,341 18,241 -- 218,582
Loans available for sale 831 -- -- 831
Loans net of the allowance for loan losses
(IBT $6,899; Farwell $722) 477,950 63,239 (1,102)(C) 540,087
Premises and equipment, net 19,387 324 599(C) 20,310
Accrued interest receivable 4,742 424 -- 5,166
Bank-owned life insurance 11,132 1,299 -- 12,431
Goodwill 3,113 -- 22,126(H) 25,239
Core deposits and other intangibles 117 -- 1,510(E) 1,627
Other assets 13,517 776 -- 14,293
-------- ------- ------- --------
TOTAL ASSETS $761,749 $91,550 $23,133 $876,432
======== ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS
Noninterest-bearing $ 71,763 $10,310 $ -- $ 82,073
Interest-bearing 544,953 66,478 (1,200)(C) 610,231
-------- ------- ------- --------
TOTAL DEPOSITS 616,716 76,788 (1,200) 692,304
Federal Home Loan Bank
Advances and other borrowed funds 44,242 -- 7,613(B)(I)(K) 51,855
Escrow payable 13,748 -- -- 13,748
Accrued interest payable and other liabilities 5,225 1,031 -- 6,256
-------- ------- ------- --------
TOTAL LIABILITIES 679,931 77,819 6,413 764,163
-------- ------- ------- --------
STOCKHOLDERS' EQUITY
Common stock 81,748 2,625 16,720(G)(F) 101,093
Additional paid in capital -- 2,625 -- 2,625
Retained earnings 1,829 8,584 -- 10,413
Accumulated other comprehensive loss (1,759) (103) -- (1,862)
-------- ------- ------- --------
TOTAL STOCKHOLDERS' EQUITY 81,818 13,731 16,720 112,269
-------- ------- ------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $761,749 $91,550 $23,133 $876,432
======== ======= ======= ========
See notes to unaudited pro forma combined financial statements
42
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME (A)
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2006
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
PRO FORMA
IBT BANCORP FARWELL -------------------------
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
----------- ---------- ------------ ----------
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 8,167 $ 1,031 $ 138(I) $ 9,336
Investment securities
Taxable 1,078 69 -- 1,147
Tax-exempt 649 82 -- 731
Federal funds sold 74 47 -- 121
---------- -------- -------- ----------
TOTAL INTEREST AND DIVIDEND INCOME 9,968 1,229 138 11,335
INTEREST EXPENSE
Deposits 3,556 400 150(I) 4,106
Borrowings 506 -- 91(I) 597
---------- -------- -------- ----------
TOTAL INTEREST EXPENSE 4,062 400 241 4,703
---------- -------- -------- ----------
NET INTEREST INCOME 5,906 829 (103) 6,632
Provision for loan losses 167 -- -- 167
---------- -------- -------- ----------
NET INTEREST INCOME, AFTER PROVISION
FOR LOAN LOSSES 5,739 829 (103) 6,465
---------- -------- -------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 1,030 52 -- 1,082
Title insurance revenue 474 -- -- 474
Gain on sale of mortgages 57 -- -- 57
Other 440 24 -- 464
---------- -------- -------- ----------
TOTAL NONINTEREST INCOME 2,001 76 -- 2,077
NONINTEREST EXPENSES
Compensation and benefits 3,529 225 3,754
Occupancy and equipment 1,169 35 11(L) 1,215
Other 1,610 189 38(E) 1,837
---------- -------- -------- ----------
TOTAL NONINTEREST EXPENSES 6,308 449 49 6,806
---------- -------- -------- ----------
INCOME BEFORE FEDERAL INCOMES TAXES 1,432 456 (151) 1,736
Federal income taxes 218 136 (54)(M) 300
---------- -------- -------- ----------
NET INCOME $ 1,214 320 (97) $ 1,436
========== ======== ======== ==========
EARNINGS PER SHARE
BASIC $ 0.22 $ 1.22 $ 0.23
========== ======== ==========
DILUTED $ 0.22 $ 1.22 $ 0.22
========== ======== ==========
Average Shares Outstanding - Basic 5,477,383 262,500 535,028(J) 6,274,911
Effect of Shares Earned in the
Deferred Director Fee Plan 158,329 -- -- 158,329
---------- -------- -------- ----------
Average Shares Outstanding - Diluted 5,635,712 262,500 535,028(J) 6,433,240
========== ======== ======== ==========
43
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME (A)
FOR THE YEAR ENDED DECEMBER 31, 2005
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
PRO FORMA
IBT BANCORP FARWELL -------------------------
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
----------- ---------- ------------ ----------
INTEREST AND DIVIDEND INCOME
Loans, including fees $ 30,682 $ 4,204 $ 551(I) $ 35,437
Investment securities
Taxable 3,487 339 -- 3,826
Tax-exempt 2,398 202 -- 2,600
Federal funds sold 315 164 -- 479
---------- -------- -------- ----------
TOTAL INTEREST AND DIVIDEND INCOME 36,882 4,909 551 42,342
INTEREST EXPENSE
Deposits 11,374 1,447 600(I) 13,421
Borrowings 1,599 -- 362(I) 1,961
---------- -------- -------- ----------
TOTAL INTEREST EXPENSE 12,973 1,447 962 15,382
---------- -------- -------- ----------
NET INTEREST INCOME 23,909 3,462 (411) 26,960
Provision for loan losses 777 -- -- 777
---------- -------- -------- ----------
NET INTEREST INCOME, AFTER PROVISION
FOR LOAN LOSSES 23,132 3,462 (411) 26,183
---------- -------- -------- ----------
NONINTEREST INCOME
Service charges on deposit accounts 4,928 209 -- 5,137
Title insurance revenue 2,351 -- -- 2,351
Gain on sale of mortgages 270 -- -- 270
Other 927 119 -- 1,046
---------- -------- -------- ----------
TOTAL NONINTEREST INCOME 8,476 328 -- 8,804
---------- -------- -------- ----------
NONINTEREST EXPENSES
Compensation and benefits 13,548 930 14,478
Occupancy and equipment 4,210 122 42(L) 4,374
Other 5,126 570 151(E) 5,847
---------- -------- -------- ----------
TOTAL NONINTEREST EXPENSES 22,884 1,622 193 24,699
---------- -------- ======== ----------
INCOME BEFORE FEDERAL INCOME TAXES 8,724 2,168 (604) 10,288
Federal income taxes 1,948 621 (217)(M) 2,352
---------- -------- -------- ----------
NET INCOME $ 6,776 $ 1,547 $ (387) $ 7,936
========== ======== ======== ==========
EARNINGS PER SHARE
BASIC $ 1.25 $ 5.89 $ 1.28
========== ======== ==========
DILUTED $ 1.25 $ 5.89 $ 1.28
========== ======== ==========
Average Shares Outstanding - Basic 5,416,961 262,500 535,028(J) 6,214,489
Effect of Shares Earned in the
Deferred Director Fee Plan 434 -- -- 434
---------- -------- -------- ----------
Average Shares Outstanding - Diluted 5,417,395 262,500 535,028(J) 6,214,923
========== ======== ======== ==========
44
BALANCE SHEETS AND STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
NOTES
(A)
The unaudited pro forma condensed combined balance sheet of IBT Bancorp, Inc.
and subsidiaries and Farwell State Savings Bank at March 31, 2006 has been
prepared as if the merger had been consummated on that date. The unaudited pro
forma condensed combined statements of income for the three-month period ended
March 31, 2006 and for the year ended December 31, 2005 were prepared as if the
merger had been consummated at the beginning of the periods presented. The
unaudited pro forma condensed combined financial statements are based on the
historical financial statements of IBT Bancorp, Inc. and the historical
financial statements of Farwell State Savings Bank and give effect to the merger
under the purchase method of accounting and the assumptions and adjustments in
the notes that follow.
Assumptions relating to the pro forma adjustments set forth in the unaudited pro
forma condensed combined financial statements are summarized as follows:
(1) Estimated fair values - The estimated fair value and resulting net
discount on loans for purposes of these pro forma financial statements
are being accreted to interest income over their remaining estimated
lives of two years, using the level yield method.
(2) The resulting adjustment on deposits and borrowings is being amortized
to interest expense over the remaining estimated lives of two years.
(B)
The cash portion of the acquisition assumes funding through available cash on
deposit with affiliate banks. For purposes of this pro forma presentation, it is
assumed that the affiliated banks will offset the loss in deposits by borrowing
from established lines of credit.
(C)
Purchase accounting fair value adjustments are estimated as follows (1).
Loans $(1,102)
Time deposits 1,200
Land, building and equipment 599
-------
Total $ 697
=======
(1) Fair value adjustments in accordance with purchase accounting under
generally accepted accounting principles.
(D)
Transaction related costs including legal, investment advisor and printing
expense are estimated to be $250,000 after tax, and have not been reflected in
these pro formas.
(E)
To record core deposit intangible created, which is estimated to be $1,510,000
and equals 4.0% of Farwell's non-contractual deposits. This amount is an
estimate of the value of the core deposit. The core deposit intangible is
assumed to be amortized on the level yield method over 10 years.
(F)
Elimination of Farwell's equity
(G)
To record common stock issued (80.0%) and cash paid (20%) for each share of
Farwell.
45
TOTAL STOCK CASH
----------- ----------- ----------
Purchase price (1) $38,062,500 $30,450,000 $7,612,500
Farwell shares outstanding (2) 262,500
Price paid per share $ 145.00
Estimated IBT stock price (3) $ 38.18
Total IBT common shares issued 797,528
(1) The cash portion of the purchase price is expected to be funded with
proceeds from internal sources and borrowing.
(2) Outstanding at March 31, 2006
(3) Estimate based on the price on the day the definitive agreement was signed
(H)
Goodwill resulting from the total purchase price less Farwell's total equity and
fair market value adjustment.
(I)
Pro forma adjustments to interest income and interest expense were calculated as
follows:
March 31, 2006 December 31, 2005
-------------- -----------------
Accretion of discount on loans (2 year straight line) $ 138 $551
===== ====
Amortized of adjustment on deposits (2 year straight line) $(150) $600
Interest expense on Federal Funds purchased (91) 362
----- ----
Total adjustments - interest expense $ 241 $962
===== ====
(J)
Basic and fully diluted weighted average number of common and common stock
equivalents utilized for the calculation of earnings per share for the periods
presented were calculated using Farwell's historical weighted average basic and
diluted shares of 262,500 plus 535,028 shares estimated to be issued to
Farwell's shareholders under the terms of the Merger Agreement. The shares to be
issued were assumed to be issued at the beginning of the period presented.
(K)
To record additional Federal Funds balances that will be required to fund a
portion of the cash paid in the transaction.
(L)
The annual depreciation associated with fair market value adjustment of the
building and equipment, over estimated useful lives of five to thirty years,
using the straight-line basis.
(M)
Income taxes calculated at 36% of pretax income.
46
FARWELL'S MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of the major factors that
influenced Farwell's financial performance as of the dates and for the periods
indicated. This analysis should be read in conjunction with Farwell's 2005
annual report and other financial information appearing elsewhere in this
document.
The data contained in this management discussion and analysis that are not
historical facts are forward looking statements subject to the safe harbor
created by the Private Securities Litigation Reform Act of 1995. Forward looking
statements, which are based on certain assumptions and describe future plans,
strategies, and expectations of Farwell, are generally identifiable by use of
the words "believe", "intend", "anticipate", "estimate", "project", or similar
expressions. Farwell's ability to predict results or the actual effect of future
plans or strategies is inherently uncertain. Factors which could have an adverse
impact on the operations and future prospects of Farwell include, but are not
limited to, changes in interest rates, general economic conditions, legislation,
regulations, fiscal policy of the United States government, monetary policy of
the Federal Reserve Board, competition from both other financial institutions
and non-financial institutions, and accounting principles. These risks and
uncertainties should be considered in evaluating forward looking statements and
undue reliance should not be placed on such statements.
RESULTS OF OPERATIONS
Net income equaled $1.55 million for the year ended December 31, 2005 compared
to $1.64 million for the same period in 2004, a 5.8% decrease. The decrease in
net income was due primarily to lower net interest income resulting from
increases in interest expense. Return on average assets, which measures the
ability of Farwell to profitably and efficiently employ its resources, equaled
1.69% during 2005 and 1.77% in 2004. Return on average equity, which indicates
how effectively Farwell is able to generate earnings on shareholder invested
capital, equaled 10.84% in 2005 versus 10.29% for the same period in 2004. Net
income for the first quarter of 2006 was $320,000, a $41,000 decrease from the
same period in 2005. Return on assets for the three month period ending March
31, 2006 and 2005 was 1.58%. Return on average equity for the three-month period
ending March 31, 2006 was 9.38% versus 9.54% in 2005. The decrease in net income
was primarily related to a decrease in net interest income and legal and
professional expenses associated with the proposed merger with IBT Bancorp's
wholly owned subsidiary Farmers State Bank of Breckenridge.
NET INTEREST INCOME
Net interest income equals interest income less interest expense and is the
primary source of income for Farwell. For analytical purposes, net interest
income is adjusted to a "taxable equivalent" basis by adding the income tax
savings from interest on tax-exempt loans and securities, thus making
year-to-year comparisons more meaningful.
Average assets for the first quarter of 2006 were $90.1 million versus $91.7
million for the year ended December 31, 2005 and $92.7 million for the year
ended December 31, 2004. The $2.6 million decrease since 2004 is primarily
related to payments of special dividends in 2004 and 2005 which has reduced
average shareholders equity by $2.2 million. Since 2004, average loans
outstanding declined $604,000 and investments by $1.6 million. As a result of
the decline in non-interest bearing and relatively low interest bearing funding
sources, and the corresponding decrease in interest earning assets, Farwell's
net interest margin has declined from 4.23% for the year ended December 31, 2004
to 3.97% in the first quarter of 2006. An additional factor adversely affecting
net interest margins is short term interest rates rising more rapidly than long
term rates. Generally, earning assets are repriced based on longer term rates
and funding sources are repriced based on short term interest rates. Thus the
cost of funding has risen disproportionately to the amount earned.
The impact on Farwell's interest income is due to a change in the asset and
liability mix and changes in rates. Management expects short term interest rates
to increase during 2006. Based on this expectation, and assets and liability
re-pricing characteristics, management projects that the fully taxable
equivalent (FTE) net interest margin as a percentage of average assets will
decrease slightly in 2006. Due to the many factors that can affect net interest
income earned, it cannot be predicted with any certainty.
Average assets were $91.7 million during 2005, a $1.0 million decrease since
December 31, 2004. Average loans outstanding increased $924,000 to $64.3
million, investments including federal funds sold decreased $1.7 million, and
other assets decreased $292,000. The decrease in average assets was primarily
due to a $1.7 million decrease in average shareholders' equity resulting from a
payout of excess capital. Deposits increased $550,000 in 2005, of which $347,000
was interest earned by customers being reinvested and a $203,000 increase in
non-interest bearing demand deposits.
47
As shown in Tables 1 and 2, when comparing the twelve month period ending
December 31, 2005 to the same period in 2004, fully taxable interest income
related to the volume of earning assets decreased $16,000. A 0.5% increase in
interest bearing liabilities resulted in $68,000 of additional interest expense.
Overall, changes in volume of assets and liabilities resulted in a reduction of
$84,000 in FTE interest income. The average FTE interest rate earned on assets
increased by 0.11%, increasing FTE interest income by $72,000 and the average
rate paid on deposits increased by 0.34% increasing interest expense by
$162,000. The increased interest rates earned and paid reduced FTE net interest
income by $90,000. Overall FTE net interest income decreased by $174,000 as a
result of changes in volume and rates.
Farwell's FTE net interest yield as a percentage of average earning assets
during 2005 decreased by 0.17% to 4.06%. The decrease is primarily a result of
the average interest rates paid on deposits increasing faster than rates earned
on assets and the decline in non-interest bearing funding from the decline in
capital.
PROVISION FOR LOAN LOSSES
The viability of any financial institution is ultimately determined by its
management of credit risk. Net loans outstanding represent 69% of Farwell's
total assets and is the single largest concentration of risk as of March 31,
2006. The allowance for loan losses is management's estimation of potential
future losses inherent in the existing loan portfolio. Factors used to evaluate
the loan portfolio, and thus to determine the current charge to expense, include
recent loan loss history, financial condition of borrowers, amount of
non-performing and impaired loans, overall economic conditions, and other
factors. This evaluation is inherently subjective as it requires material
estimates, including the amounts and timing of future cash flows and may be
subject to significant change.
During the first quarter of 2006, Farwell had net charge-offs of $35,000 or
0.21% of loans on an annualized basis. The net loss was entirely related to
consumer loans. Loans classified as substandard declined from 1.23% of gross
loans outstanding as of December 31, 2005 to 1.06% as of March 31, 2006.
As shown in Table 3, net loan charge offs were $44,000 in 2005, a $21,000
increase from 2004. Net charged off loans were 0.07% of average loans in 2005
and 0.04% in 2004. The allowance for loan losses as a percentage of loans
equaled 1.20% and 1.38% as of December 31, 2005 and 2004 respectively.
48
TABLE 1. FARWELL AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, AND AVERAGE
RATES (DOLLARS IN THOUSANDS)
The following schedules present the daily average amount outstanding for each
major category of interest earning assets, non-earning assets, interest bearing
liabilities, and non-interest 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. Non-accruing loans, for the purpose of the following
computations, are included in the average loan amounts outstanding.
2005 2004
------------------------------ ------------------------------
Tax Average Tax Average
Average Equivalent Yield\ Average Equivalent Yield\
Balance Interest Rate Balance Interest Rate
------- ---------- ------- ------- ---------- -------
INTEREST EARNING ASSETS:
Loans $64,271 $4,208 6.55% $63,347 $4,138 6.53%
Taxable investment securities 10,972 339 3.09 13,462 472 3.51
Non-taxable investment securities 7,370 306 4.15 7,622 303 3.98
Federal funds sold 5,248 164 3.13 4,156 48 1.15
------- ------ ---- ------- ------ ----
Total earning assets 87,861 5,017 5.71 88,587 4,961 5.60
NON EARNING ASSETS:
Allowance for loan losses (812) (830)
Cash and due from banks 1,893 2,164
Premises and equipment 321 350
Accrued income and other assets 2,416 2,408
------- -------
Total assets $91,679 $92,679
======= =======
INTEREST BEARING LIABILITIES
Interest-bearing demand deposits $ 8,473 89 1.05 $ 9,719 76 0.78
Savings deposits 21,587 172 0.80 22,969 183 0.80
Time deposits 36,283 1,186 3.27 33,308 958 2.88
------- ------ ---- ------- ------ ----
Total interest bearing liabilities 66,343 1,447 2.18 65,996 1,217 1.84
NONINTEREST BEARING LIABILITIES:
Demand deposits 9,853 9,650
Other 1,216 1,071
Shareholders' equity 14,267 15,962
------- -------
Total liabilities and equity $91,679 $92,679
======= =======
Net interest income (FTE) $3,570 $3,744
====== ======
Net yield on interest earning
assets (FTE) 4.06% 4.23%
==== ====
49
(DOLLARS IN THOUSANDS)
The following table details the dollar amount of changes in FTE net interest
income for each major category of interest earning assets and interest bearing
liabilities, and the amount of change attributable to changes in average
balances (volume) or average rates. The change in interest due to both volume
and rate, has been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of the change in each.
2005 Compared to 2004 2004 Compared to 2003
Increase (Decrease) Increase (Decrease)
due to Due to
--------------------- ----------------------
Volume Rate Net Volume Rate Net
------ ---- ----- ------ ----- -----
CHANGES IN INTEREST INCOME:
Loans $ 60 $ 10 $ 70 $255 $(411) $(156)
Taxable investment securities (81) (52) (133) (42) (152) (194)
Nontaxable investment securities (10) 13 3 34 (29) 5
Federal funds sold 15 101 116 (7) 4 (3)
---- ---- ----- ---- ----- -----
Total changes in interest income (16) 72 56 240 (588) (348)
Total changes in interest expense 68 162 230 (31) (251) (282)
---- ---- ----- ---- ----- -----
Net Change in Net Interest Income (FTE) $(84) $(90) $(174) $271 $(337) $ (66)
==== ==== ===== ==== ===== =====
TABLE 3. FARWELL SUMMARY OF LOAN LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
December 31
-----------------
2005 2004
------- -------
Amount of loans outstanding at the
end of period $64,246 $64,704
======= =======
Average amount of loans outstanding
for the period $64,271 $63,347
======= =======
Summary of changes in allowances:
Allowance for loan losses - January 1 $ 816 $ 823
Loans charged off:
Commercial and agricultural -- --
Real estate mortgage 24 --
Installment 37 56
------- -------
TOTAL LOANS CHARGED OFF 61 56
Recoveries:
Commercial and agricultural -- --
Real estate mortgage -- --
Installment 17 33
------- -------
TOTAL RECOVERIES 17 33
------- -------
Net charge-offs 44 23
Provision charged to income 0 16
------- -------
ALLOWANCE FOR LOAN LOSES - DECEMBER 31 $ 772 $ 816
======= =======
Ratio of net charge-offs during the
year to average loans outstanding 0.07% 0.04%
======= =======
Ratio of the allowance for loan losses
to loans outstanding at year end 1.20% 1.26%
======= =======
As shown in Table 4, loans classified as nonperforming plus other real estate
were $793,000 as December 31, 2005, an increase of $201,000 since December 31,
2004. Nonperforming loans as a percentage of outstanding loans were 1.23% and
0.91% as December 31, 2005 and 2004 respectively. During 2005 net charged off
loans were $44,000 and the provision for loans losses was zero. Management did
not
50
provide for any loan losses in 2005 as a result of their internal analysis for
allowance for loan losses showing an adequate amount of allowance for loan
losses. The policy of Farwell is to transfer a loan, including impaired loans,
to non-accrual status whenever it is determined that the interest should be
recorded on a cash basis instead of the accrual basis because of a deterioration
in the financial position of the borrower, it is determined that the payment in
full of principal or interest cannot be expected, or the loan has been in
default for a period of 90 days or more, unless it is both well secured and in
the process of collection. Restructured loans are loans whose terms have been
renegotiated to provide for deferral of interest or principal because of a
borrower's deterioration in their financial position.
TABLE 4. FARWELL NONPERFORMING LOANS
(DOLLARS IN THOUSANDS)
The following loans are all the credits which required classification for state
or federal regulatory purposes. Non-performing loans, including other real
estate acquired in satisfaction of loans, were as follows:
December 31
March 31, -------------
2006 2005 2004
--------- ----- -----
Non-accrual loans $ -- $ -- $ 117
Accruing loans past due
90 days or more 678 793 475
Restructured loans -- -- --
----- ----- -----
Total $ 678 $ 793 $ 592
===== ===== =====
Non-performing loans as
a % of outstanding loans 1.06% 1.23% 0.91%
===== ===== =====
As of March 31, 2006, there were no other interest bearing assets which would
require classification. Management is not aware of any recommendations by
regulatory agencies which, if implemented, would have a significant impact on
liquidity, capital, or operations.
In management's opinion, the allowance for loan losses is adequate as of
December 31, 2005. Management has allocated, as shown in Table 5, the allowance
for loan losses to the following categories: commercial and agricultural, 7.7%;
real estate mortgages, 15.9%; installment loans, 68.1%; and unallocated, 8.3%.
TABLE 5. FARWELL ALLOCATION ON THE ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
The allowance for loan losses has been allocated according to the amount deemed
to be reasonably necessary to provide for the possibility of losses being
incurred within the following categories:
December 31
---------------------------------------------
2005 2004
--------------------- ---------------------
% of each % of each
Category Category
Allowance to Total Allowance to Total
Amount Loans Amount Loans
--------- --------- --------- ---------
Commercial and agricultural $ 59 7.4% $ 63 6.7%
Real estate mortgage 123 87.2 130 87.5
Installment 526 5.4 560 5.8
Unallocated loans 64 -- 63 --
---- ----- ---- -----
Total $772 100.0% $816 100.0%
==== ===== ==== =====
51
NON-INTEREST INCOME AND EXPENSE
Noninterest income consists of deposit service charges and fees for other
financial services. Total income earned from these sources increased $7,000 in
the first quarter of 2006 versus the same period in 2005 and $3,000 during the
year ended December 31, 2005 when compared to the year ended December 31, 2004.
There were no significant changes in any one category during these periods.
Total noninterest expense for the first quarter of 2006 increased $61,000 or
15.7%, when compared to the same period in 2005. The majority of the increase in
2006 is related to an increase in audit and accounting fees as the result of
having a financial statement audit in 2005 versus a compilation in prior years
and legal and other professional expenses related to the proposed merger with
Farmers.
Total non-interest expense for the year ended December 31, 2005 increased
$41,000 or 2.6%. Salary and benefits increased $23,000, equipment and occupancy
expense decreased $13,000 and all other expenses increased $31,000. The largest
component of non-interest expense is salaries and employee benefits. The $23,000
increase is related to normal merit salary increases and increased benefit
costs. Occupancy and equipment expenses decreased $13,000. The decrease is
associated with a decrease in depreciation of equipment and building repairs.
Other non-interest expenses increased $31,000 or 5.8%. The most significant
changes were increases in legal and professional expenses related to the
proposed merger with Farmers.
FEDERAL INCOME TAXES
Federal income tax expense in 2005 was $621,000 or 28.6% of pretax income and in
2004 $732,000 or 30.8% of pre-tax income. The difference between the statutory
rate of 34% and actual rates paid is primarily due to the exclusion of interest
income earned on tax exempt municipal bonds from taxable income.
ANALYSIS OF CHANGES IN FINANCIAL CONDITION
When comparing 2005 year ending balances to 2004, total assets increased $91,000
to $89.1 million. During this period, loans outstanding decreased $414,000,
while fed funds sold and investment securities increased $651,000. Changes in
funding sources include a $1.1 million increase in non-interest bearing
deposits, a $393,000 increase in interest bearing deposits, and a $1.4 million
decrease in shareholders' equity.
INVESTMENT SECURITIES
The primary objective of investing activities is to provide for safety of the
principal invested. Secondary considerations include the need for earnings and
liquidity. During 2005, Farwell's net holdings of investment securities
decreased $471,000. Table 6 shows the carrying value of investment securities
available for sale. At December 31, 2005, Farwell held no securities of any
single issue that exceeded 10% of shareholders' equity.
TABLE 6. FARWELL INVESTMENT PORTFOLIO
(DOLLARS IN THOUSANDS)
The following is a schedule of the carrying value of investment securities
available for sale:
December 31
-----------------
2005 2004
------- -------
Available For Sale:
U.S. Treasury and U.S. Government agencies $ 8,041 $ 5,596
State and political subdivisions 8,339 11,645
Mortgage backed 22 126
Other securities 1,521 1,027
------- -------
Total investment securities $17,923 $18,394
======= =======
52
AVERAGE YIELDS (DOLLARS IN THOUSANDS)
The following table shows the relative maturities of securities available for
sale at fair value and their weighted average interest rate for each maturity
range as of December 31, 2005. There were no investments with a stated maturity
date greater than 5 years. All interest rates are reported on a fully taxable
equivalent (FTE) basis using a 34% tax rate.
MATURING
--------------------------------------------------------------------
After one Year After Five Years
Within But Within but Within After
One Year Five Years Ten Years Ten Years
-------------- --------------- ---------------- --------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------- ----- ------ ----- ------ -----
Available for sale:
U.S. treasury and U.S. government agencies $3,978 2.40% $ 4,063 4.11% $ -- --% $-- --%
State and political subdivisions 2,205 2.66 5,328 3.06 806 5.02 -- --
Mortgage backed 22 5.22 -- -- -- -- -- --
Other -- -- 1,521 3.58 -- -- -- --
------ ---- ------- ---- ---- ---- --- ---
Total $6,205 2.50% $10,912 3.52% $806 5.02% $ 0 --%
====== ==== ======= ==== ==== ==== === ===
LOANS
Loans are the largest component of earning assets. As a percentage of assets,
gross loans outstanding were $72.1% as of December 31, 2005. The proper
management of credit risk and market risk is critical to the financial well
being of Farwell. To control these risks, Farwell has adopted strict
underwriting standards. The standards include limits against lending outside
Farwell's defined market area, lending limits to a single borrower, and loan to
collateral value limits. Farwell 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. FARWELL LOAN PORTFOLIO
(DOLLARS IN THOUSANDS)
As shown in the following table, total loans decreased $458,000 in 2005 to $64.2
million. The decrease was primarily in residential real estate and personal loan
categories.
December 31
-----------------
2005 2004
------- -------
Real estate mortgage $55,998 $56,601
Commercial 4,626 4,255
Agricultural 114 86
Personal 3,508 3,762
------- -------
Total $64,246 $64,704
======= =======
TABLE 9. FARWELL LOAN MATURITY AND INTEREST SENSITIVITY
(DOLLARS IN THOUSANDS)
The following table shows the maturity of commercial and agricultural loans
outstanding at December 31, 2005. Also provided are the amounts due after one
year, classified according to the sensitivity to changes in interest rates.
DUE IN
----------------------------------
1 YEAR 1 TO 5 OVER 5
OR LESS YEARS YEARS TOTAL
------- ------ ------ ------
Commercial and agricultural $1,015 $3,725 $-- $4,740
====== ====== === ======
Interest Sensitivity:
Loans maturing after one year which have:
Fixed interest rates $3,725 $--
Variable interest rates -- --
------ ---
Total $3,725 $--
====== ===
53
DEPOSITS
Deposits are the largest source of funds for financing asset growth. As shown in
Table 10, average deposits increased $550,000 in 2005 or 0.7%. Within the
banking industry there is agreement that competition from equity investments,
the bond market, and other financial intermediaries has had a significant impact
on deposit growth. The result of this competition is a general slowing of
deposit growth. To fund asset growth in the future, it is likely that Farwell is
going to have to obtain funds from other sources such as the Federal Home Loan
Bank.
TABLE 10. FARWELL AVERAGE DEPOSITS
(DOLLARS IN THOUSANDS)
December 31, December 31,
2005 2004
-------------- --------------
Amount Rate Amount Rate
------- ---- ------- ----
Non-interest bearing demand deposits $ 9,853 $ 9,650
Interest-bearing demand deposits 8,473 1.05% 9,719 0.78%
Savings deposits 21,587 0.80 22,969 0.80
Time deposits 36,283 3.27 33,308 2.88
------- -------
Total $76,196 $75,646
======= =======
TABLE 11. FARWELL MATURITIES OF TIME CERTIFICATES OF DEPOSITS OVER $100,000
(DEPOSITS IN THOUSANDS)
The following table shows the maturity schedule and amounts of time deposits of
more than $100,000 for the dates indicated. These deposits represent 34.8% of
the total deposits in 2005 and 35.7% in 2004.
DECEMBER 31,
-----------------
2005 2004
------- -------
Maturity:
Within 3 months $ 3,294 $ 3,955
Within 3 to 12 months 7,641 8,949
Within 1 to 3 years 9,134 7,529
Over 3 years 5,850 5,588
------- -------
$25,919 $26,021
======= =======
CAPITAL
The capital of Farwell consists solely of common stock, capital surplus,
retained earnings, and accumulated other comprehensive income. Total capital
decreased $1.4 million in 2005. The decrease was related to the payment of $2.9
million cash dividend in 2005.
The Federal Reserve Board's current recommended minimum primary capital to
assets requirement is 6.0%. Farwell's primary capital to assets, which consists
of shareholders' equity plus allowance for loan losses was 15.9% as of December
31, 2005.
The Federal Reserve has also established minimum capital requirements for banks.
Table 12 shows the minimum regulatory capital requirement to be considered well
capitalized and Farwell's ratios. Tier 1 capital consists of shareholders'
equity, excluding unrealized gains and losses on securities available for sale
less intangible assets. Total capital is comprised of Tier 1 capital plus the
allowance for loan losses. At March 31, 2006, Farwell continued to be well
capitalized under the prompt corrective action regulatory criteria, as shown
below.
TABLE 12. FARWELL REGULATORY MINIMUM TO BE WELL CAPITALIZED AND FARWELL'S RATIOS
FARWELL STATE REGULATORY
SAVINGS MINIMUM TO BE
BANK WELL CAPITALIZED
------------- ----------------
Tier 1 capital to average assets 15.4% 5.0%
Tier 1 capital to risk weighted assets 29.0% 6.0%
Total capital to risk weighted assets 30.2% 10.0%
54
LIQUIDITY
Liquidity management is designed to have adequate resources available to meet
depositor and borrower discretionary demands for funds. Liquidity is also
required to fund expanding operations, investment opportunities, and the payment
of cash dividends. The primary sources of Farwell's liquidity are cash, cash
equivalents, and investment securities available for sale.
As of March 31, 2006, cash and cash equivalents as a percentage of total assets
equaled 7.9% versus 5.6% as of December 31, 2005. During the first three months
of 2006, $152,000 in net cash was provided from operations. Investing activities
used $135,000 and financing activities resulted in a $2.3 million increase in
cash and cash equivalents. Overall, cash and cash equivalents increased $2.3
million in the first quarter of 2006. In addition to funding from traditional
sources Farwell has the ability to borrow in the federal funds market. Farwell's
liquidity is considered adequate by management.
ASSET AND LIABILITY MANAGEMENT
Asset and liability management aims at achieving reasonable stability in the net
interest margins through periods of changing interest rates. One method to
measure the exposure to changes in interest rates is gap analysis. GAP analysis
measure the cash flows and/or the earliest repricing of Farwell's interest
bearing assets and liabilities. The analysis is useful for measuring trends in
the repricing characteristics of the balance sheet. As shown in Table 13, the
gap analysis depicts Farwell's position for specific time periods and the
cumulative gap as a percentage of total assets.
Investment securities and other investments are scheduled according to their
contractual maturity. Nonvariable rate loans are included in the appropriate
time frame based on their scheduled amortization. Farwell does not offer
variable rate loans. Time deposits are scheduled according to their contractual
maturity. Money market, NOW, and savings accounts have no contractual maturity
and are believed to be predominantly noninterest sensitive by management. For
purposes of gap analysis, these deposits are included in the 0-3 month repricing
time frame.
Farwell has no foreign exchange risk, holds no trading account assets, nor does
it utilize interest rate swaps or derivatives in the management of its interest
rate risk. Farwell does have a significant portion of its assets in real estate
mortgages.
TABLE 13. FARWELL INTEREST RATE SENSITIVITY
(DOLLARS IN THOUSANDS)
The following table shows the time periods and the amount of assets and
liabilities available for interest rate repricing as of December 31, 2005. For
purposes of this analysis, nonaccrual loans and the allowance for loan losses
are excluded.
0-3 4-12 1 to 5 Over 5
MONTHS MONTHS YEARS YEARS
------- ------- ------- -------
Interest Sensitive Assets:
Federal funds sold $ 3,232 $ -- $ -- $ --
Investment securities 2,754 4,948 9,415 806
Loans 1,218 4,233 58,553 242
------- ------- ------- -------
TOTAL $ 7,204 $ 9,181 $67,968 $ 1,048
======= ======= ======= =======
Interest Sensitive Liabilities:
Time deposits $ 5,375 10,684 20,580 $ --
Savings 4,746 1,100 11,026 2,961
Interest bearing demand 1,385 923 5,482 477
------- ------- ------- -------
TOTAL 11,506 12,707 37,088 3,438
======= ======= ======= =======
Cumulative gap deficiency $(4,305) $(7,831) $23,050 $20,660
Cumulative gap deficiency as a % of assets (4.83)% (8.78)% 25.86% 23.18%
IMPACT OF INFLATION
The majority of assets and liabilities of financial institutions are monetary in
nature. Generally, changes in interest rates have a more significant impact on
earnings of Farwell than inflation. Although influenced by inflation, changes in
rates do not necessarily move in either the same magnitude or direction as
changes in the price of goods and services. Inflation does impact the growth of
total assets, creating a need to increase equity capital at a higher rate to
maintain an adequate equity to assets ratio, which in turn reduces the amount of
earnings available for cash dividends.
55
The Farwell State Savings Bank
Farwell, Michigan
Financial Statements
Years Ended
December 31, 2005, 2004 and 2003
56
THE FARWELL STATE SAVINGS BANK
TABLE OF CONTENTS
PAGE
-----
INDEPENDENT AUDITORS' REPORT 52
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005, 2004, AND 2003
Balance Sheets 53
Statements of Income 54
Statements of Comprehensive Income 55
Statements of Changes in Stockholders' Equity 56
Statements of Cash Flows 57
Notes to Financial Statements 58-71
57
INDEPENDENT AUDITORS' REPORT
Stockholders and Board of Directors
The Farwell State Savings Bank
Farwell, Michigan
We have audited the accompanying balance sheet of THE FARWELL STATE SAVINGS BANK
as of December 31, 2005, and the related statements of income, comprehensive
income, changes in stockholders' equity and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit of the 2005 financial statements 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2005 financial statements referred to above present fairly,
in all material respects, the financial position of THE FARWELL STATE SAVINGS
BANK as of December 31, 2005, and the results of its operations and its cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
/s/ REHMANN ROBSON
----------------------------------------
Saginaw, Michigan
January 27, 2006
58
BALANCE SHEETS
(Dollars in Thousands)
DECEMBER 31
---------------------
2005 2004
------- -----------
(UNAUDITED)
ASSETS
Cash and due from banks $ 1,720 $ 2,059
Federal funds sold 3,232 2,110
------- -------
CASH AND CASH EQUIVALENTS 4,952 4,169
Securities available for sale 17,923 18,394
Net loans 63,474 63,888
Premises and equipment, net 328 331
Accrued interest receivable 425 419
Other assets 2,040 1,850
------- -------
TOTAL ASSETS $89,142 $89,051
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS
Interest-bearing $64,739 $64,346
Noninterest-bearing 9,639 8,541
------- -------
TOTAL DEPOSITS 74,378 72,887
Accrued interest payable and other liabilities 1,209 1,165
------- -------
TOTAL LIABILITIES 75,587 74,052
Commitments and contingencies (Notes 11 and 13)
STOCKHOLDERS' EQUITY
Common stock, $10 par value; 262,500 shares authorized,
issued and outstanding 2,625 2,625
Additional paid-in capital 2,625 2,625
Retained earnings 8,396 9,736
Accumulated other comprehensive (loss) income (91) 13
------- -------
TOTAL STOCKHOLDERS' EQUITY 13,555 14,999
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $89,142 $89,051
======= =======
The accompanying notes are an integral part of these financial statements.
59
THE FARWELL STATE SAVINGS BANK
STATEMENTS OF INCOME
(Dollars in Thousands)
YEARS ENDED DECEMBER 31
----------------------------------
2005 2004 2003
------ ----------- -----------
(UNAUDITED) (UNAUDITED)
INTEREST INCOME
Loans, including fees $4,204 $4,149 $4,291
Debt securities
Taxable 339 466 666
Tax-exempt 202 200 197
Federal funds sold 164 48 51
------ ------ ------
TOTAL INTEREST INCOME 4,909 4,863 5,205
Interest expense on deposits 1,447 1,217 1,498
------ ------ ------
NET INTEREST INCOME 3,462 3,646 3,707
Provision for loan losses -- 16 48
------ ------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,462 3,630 3,659
------ ------ ------
NONINTEREST INCOME
Service charges on deposit accounts 209 222 220
Other 119 103 148
------ ------ ------
TOTAL NONINTEREST INCOME 328 325 368
------ ------ ------
NONINTEREST EXPENSES
Compensation and benefits 930 907 832
Occupancy and equipment 122 135 149
Other 570 539 505
------ ------ ------
TOTAL NONINTEREST EXPENSES 1,622 1,581 1,486
------ ------ ------
INCOME BEFORE FEDERAL INCOME TAXES 2,168 2,374 2,541
Federal income taxes 621 732 788
------ ------ ------
NET INCOME $1,547 $1,642 $1,753
====== ====== ======
NET INCOME PER BASIC SHARE OF COMMON STOCK $ 5.89 $ 6.26 $ 6.68
====== ====== ======
The accompanying notes are an integral part of these financial statements.
60
STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
YEAR ENDED DECEMBER 31
----------------------------------
2005 2004 2003
------ ----------- -----------
(UNAUDITED) (UNAUDITED)
Unrealized holding losses on available-for-sale
securities arising during the year $ (157) $ (302) $ (339)
Income tax benefit related to other comprehensive loss 53 103 115
------ ------ ------
OTHER COMPREHENSIVE LOSS (104) (199) (224)
Net income 1,547 1,642 1,753
------ ------ ------
COMPREHENSIVE INCOME $1,443 $1,443 $1,529
====== ====== ======
The accompanying notes are an integral part of these financial statements.
61
THE FARWELL STATE SAVINGS BANK
STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
(Dollars in Thousands)
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE TOTAL
---------------- PAID-IN RETAINED INCOME STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS (LOSS) EQUITY
------- ------ ---------- -------- ------------- -------------
BALANCES, JANUARY 1, 2003 (UNAUDITED) 262,500 $2,625 $2,625 $10,674 $ 436 $16,360
Comprehensive income -- -- -- 1,753 (224) 1,529
Cash dividends paid -
$3.25 per share of common stock -- -- -- (854) -- (854)
------- ------ ------ ------- ----- -------
BALANCES, DECEMBER 31, 2003 (UNAUDITED) 262,500 2,625 2,625 11,573 212 17,035
Comprehensive income -- -- -- 1,642 (199) 1,443
Cash dividends paid -
$13.25 per share of common stock -- -- -- (3,479) -- (3,479)
------- ------ ------ ------- ----- -------
BALANCES, DECEMBER 31, 2004 (UNAUDITED) 262,500 2,625 2,625 9,736 13 14,999
Comprehensive income -- -- -- 1,547 (104) 1,443
Cash dividends paid -
$11.00 per share of common stock -- -- -- (2,887) -- (2,887)
------- ------ ------ ------- ----- -------
262,500 $2,625 $2,625 $ 8,396 $ (91) $13,555
======= ====== ====== ======= ===== =======
The accompanying notes are an integral part of these financial statements.
62
THE FARWELL STATE SAVINGS BANK
STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
YEAR ENDED DECEMBER 31
-----------------------------------
2005 2004 2003
------- ----------- -----------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,547 $ 1,642 $ 1,753
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses -- 16 48
Depreciation 34 48 77
Deferred income taxes (benefit) 14 (96) 3
Net amortization of investments 174 202 131
(Gain) loss on sale of premises and equipment (11) -- 12
Loss on sale of other real estate owned -- 13 4
Changes in operating assets and liabilities
which (used) provided cash
Life insurance (9) (38) (28)
Accrued interest receivable (6) 75 40
Other assets 40 104 (32)
Accrued interest payable and other liabilities 44 60 (7)
------- -------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,827 2,026 2,001
------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available-for-sale securities
Purchases (6,312) (10,967) (7,556)
Maturities, prepayments and calls 6,452 13,116 8,057
Loan originations and principal collections, net 232 (2,954) (2,658)
Proceeds from the sale of premises and equipment 16 -- 11
Proceeds from the sale of other real estate owned -- 132 30
Purchases of premises and equipment (36) (12) (56)
------- -------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 352 (685) (2,172)
------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in non-interest bearing deposits 1,098 (381) 654
Net increase (decrease) in interest-bearing deposits 393 (409) (31)
Cash dividends paid on common stock (2,887) (3,479) (854)
------- -------- -------
NET CASH USED IN FINANCING ACTIVITIES (1,396) (4,269) (231)
------- -------- -------
Net change in cash and cash equivalents 783 (2,928) (402)
Cash and cash equivalents, beginning of year 4,169 7,097 7,499
------- -------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,952 $ 4,169 $ 7,097
======= ======== =======
The accompanying notes are an integral part of these financial statements.
63
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND CONCENTRATIONS OF RISK
THE FARWELL STATE SAVINGS BANK ("Farwell") provides a variety of financial
services to individuals and businesses in Mid-Michigan through its two
locations in Farwell and Lake, Michigan. Active competition, principally
from other commercial banks, savings banks and credit unions, exists in all
of Farwell's primary markets. Farwell's results of operations can be
significantly affected by changes in interest rates or changes in the
tourism industry which comprise a significant portion of the local economic
environment.
Farwell's primary deposit products are interest and noninterest bearing
checking accounts, savings accounts and time deposits and its primary
lending products are real estate mortgages, commercial and consumer loans.
Note 3 further describes the types of lending Farwell engages in and Note 6
provides additional information on deposits. Note 2 discusses the types of
securities Farwell invests in. Farwell does not have significant
concentrations with respect to any one industry, customer, or depositor.
Farwell is a state chartered bank and is a member of the Federal Deposit
Insurance Corporation ("FDIC") Bank Insurance Fund. Farwell is subject to
the regulations and supervision of the FDIC and state regulators and
undergoes periodic examinations by these regulatory authorities.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as
of the date of the balance sheet and the reported amounts of revenues and
expenses during the year. Actual results could differ from those estimates.
The material estimate that is particularly susceptible to significant
change in the near term relates to the determination of the allowance for
loan losses.
ACCOUNTING POLICIES
Accounting policies used in preparation of the accompanying financial
statements conform to predominant banking industry practices and are based
on generally accepted accounting principles. The principles which
materially affect the determination of the financial position or results of
operations of Farwell are summarized below:
CASH AND CASH EQUIVALENTS
For the purposes of the statements of cash flows, cash and cash
equivalents include cash on hand, amounts due from banks, and federal
funds sold. Generally, federal funds are sold for a one-day period.
Farwell maintains deposit accounts in various financial institutions
which generally exceed federally insured limits or are not insured.
SECURITIES
Securities are classified as "available-for-sale" and are recorded at
fair value with unrealized gains and
64
THE FARWELL STATE SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
losses, net of the effect of deferred income taxes, excluded from
earnings and reported in other comprehensive income.
Purchase premiums and discounts are recognized in interest income
using the interest method over the terms of the securities. Declines
in the fair value of available-for-sale securities below their cost
that are deemed to be other than temporary are reflected in earnings
as realized losses. In estimating other-than-temporary impairment
losses, management considers 1) the length of time and extent to which
the fair value has been less than cost, 2) the financial condition and
near-term prospects of the issuer, and 3) the intent and ability of
Farwell to retain its investment in the issuer for a period of time
sufficient to allow for anticipated recovery in fair value. Gains or
losses on the sale of securities are recorded on the trade date and
are determined using the specific identification method.
LOANS
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are generally reported
at their outstanding unpaid principal balances adjusted for
charge-offs, the allowance for loan losses, and any deferred fees or
costs on originated loans. Interest income is accrued on the unpaid
principal balance. Management estimates that direct costs incurred in
originating loans classified as held-to-maturity approximate the
origination fees generated on these loans. Therefore, net deferred
loan origination fees on loans classified as held-to-maturity are not
included on the accompanying balance sheets.
The accrual of interest on mortgage and commercial loans is
discontinued at the time the loan is 90 days past due unless the
credit is well-secured and in process of collection. Personal loans
are typically charged off no later than 180 days past due. Past due
status is based on contractual terms of the loan. In all cases, loans
are placed on non-accrual or charged-off at an earlier date if
collection of principal and interest is considered doubtful.
All interest accrued but not collected for loans that are placed on
non-accrual or charged off is reversed against interest income, while
interest accrued but not collected for prior years is reversed against
the allowance for loan losses. The interest on these loans is
accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual. Loans are returned to accrual status
when all principal and interest amounts contractually due are brought
current and future payments are reasonably assured.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are estimated
to have occurred through a provision for loan losses charged to
earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of the loan balance is
confirmed. Subsequent recoveries, if any, are credited to the
allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to
65
THE FARWELL STATE SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
repay, estimated value of any underlying collateral and prevailing
economic conditions. This evaluation is inherently subjective as it
requires estimates that are susceptible to significant revision as
more information becomes available.
The allowance consists of specific, general and unallocated
components. The specific component relates to loans that are
classified as doubtful, substandard or special mention. For such loans
that are classified as impaired, an allowance is established when the
discounted cash flows (or collateral value or observable market price)
of the impaired loan is lower than the carrying value of that loan.
The general component covers non-classified loans and is based on
historical loss experience adjusted for qualitative factors. An
unallocated component is maintained to cover uncertainties that could
affect management's estimate of probable losses. The unallocated
component of the allowance reflects the margin of imprecision inherent
in the underlying assumptions used in the methodologies for estimating
specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and
events, it is probable that Farwell will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status,
collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not
classified as impaired. Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking
into consideration all of the circumstance surrounding the loan and
the borrower, including the length of the delay, the reasons for the
delay, the borrower's prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment
is measured on a loan by loan basis for commercial and construction
loans by either the present value of expected future cash flows
discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the
loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, Farwell generally does not
separately identify individual consumer and residential loans for
impairment disclosures, unless such loans are the subject of a
restructuring agreement.
FORECLOSED ASSETS
Assets acquired through, or in lieu of, loan foreclosure are held for
sale and are initially recorded at fair value at the date of transfer,
establishing a new cost basis. Subsequent to foreclosure, valuations
are periodically performed by management and the assets are carried at
the lower of the carrying amount or fair value less costs to sell.
Revenue and expenses from operations and changes in the valuation
allowance are included in net expenses from foreclosed assets.
66
THE FARWELL STATE SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
PREMISES AND EQUIPMENT
Land is carried at cost. Premises and equipment are carried at cost
less accumulated depreciation. Depreciation is computed principally by
the straight-line method based upon the useful lives of the related
assets which generally range from 3 to 40 years. Maintenance, repairs,
and minor alterations are charged to current operations as
expenditures occur and major improvements are capitalized.
CORPORATE OWNED LIFE INSURANCE
Farwell has purchased life insurance policies on certain key
executives. Corporate owned life insurance is recorded at its cash
surrender value, or the amount that can be realized.
OFF-BALANCE SHEET CREDIT RELATED FINANCIAL INSTRUMENTS
In the ordinary course of business, Farwell has entered into
commitments to extend credit, including commercial letters of credit
and standby letters of credit. Such financial instruments are recorded
when they are funded.
FEDERAL INCOME TAXES
Federal income taxes are provided for the tax effects of transactions
reported in the 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.
NET INCOME PER SHARE
Net income per basic share of common stock represents income available
to common stockholders divided by the weighted-average number of
common shares outstanding during the year, which was 262,500 in 2005,
2004, and 2003.
2. INVESTMENT SECURITIES
The amortized cost and fair value of available-for-sale securities with
unrealized gains and losses are as follows as of December 31:
67
THE FARWELL STATE SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
Amortized Unrealized Unrealized Fair
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
2005
U.S. government and
federal agency $ 8,112 $ -- $ 71 $ 8,041
States and municipal 8,377 27 65 8,339
Corporate 1,549 -- 28 1,521
Mortgage-backed securities 22 -- -- 22
------- ---- ---- -------
TOTAL $18,060 $ 27 $164 $17,923
======= ==== ==== =======
2004
U.S. government and
federal agency $ 5,641 $ 1 $ 46 $ 5,596
States and municipal 11,577 104 36 11,645
Corporate 1,032 4 9 1,027
Mortgage-backed securities 124 2 -- 126
------- ---- ---- -------
TOTAL $18,374 $111 $ 91 $18,394
======= ==== ==== =======
68
THE FARWELL STATE SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
The amortized cost and fair value of available-for-sale securities by
contractual maturity at December 31, 2005 are as follows:
AMORTIZED FAIR
COST VALUE
--------- -------
Due in one year or less $ 6,247 $ 6,184
Due after one year through five years 11,004 10,911
Due after five years through ten years 787 806
------- -------
Subtotal 18,038 17,901
Mortgage-backed securities 22 22
------- -------
TOTAL $18,060 $17,923
======= =======
Because of their variable payments, mortgage-backed securities are not
reported by a specific maturity group.
Information pertaining to securities with unrealized losses at December 31,
2005, aggregated by investment category and the length of time that
individual securities have been in a continuous loss position is as
follows:
LESS THAN TWELVE
MONTHS OVER TWELVE MONTHS
------------------- -------------------
UNREALIZED FAIR UNREALIZED FAIR
LOSSES VALUE LOSSES VALUE
---------- ------ ---------- ------
SECURITIES AVAILABLE-FOR-SALE
DEBT SECURITIES
U.S. Government and
federal agency $17 $3,050 $ 54 $4,495
State and municipal 20 2,935 45 3,181
Corporate 13 1,020 15 501
--- ------ ---- ------
TOTAL DEBT SECURITIES $50 $7,005 $114 $8,177
=== ====== ==== ======
Management evaluates securities for other-than-temporary impairment at
least on a quarterly basis, and more frequently when economic or market
concerns warrant such evaluation. Consideration is given to (1) the length
of time and the extent to which the fair value has been less than cost, (2)
the financial condition and near-term prospects of the issuer, and (3) the
intent and ability of Farwell to retain its investment in the issuer for a
period of time sufficient to allow for any anticipated recovery in fair
value.
At December 31, 2005, 12 government and federal agencies, 33 state and
municipal, and 3 corporate securities have unrealized losses with aggregate
depreciation of 1.0%, 1.0% and 1.3%, respectively.
In analyzing an issuer's financial condition, management considers whether
the securities are issued by the federal government or its agencies,
whether downgrades by bond rating agencies have occurred, and industry
analysts' reports. As Farwell has the ability to hold debt securities until
maturity, or for the foreseeable future
69
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
if classified as available for sale, no declines are deemed to be other
than temporary.
3. LOANS
Farwell grants commercial, consumer and residential mortgage loans to
customers situated primarily in Mid-Michigan. The ability of Farwell's
debtors to honor their contracts is dependent upon the real estate and
general economic conditions in this area. Substantially all of the consumer
and residential loans are secured by various items of property, while
commercial loans are secured primarily by business assets and personal
guarantees; a portion of loans are unsecured.
Major loan classifications are as follows at December 31:
2005 2004
------- -------
Mortgage loans on real estate
Residential 1-4 family $53,790 $53,744
Commercial and agricultural 4,025 3,533
Construction 2,208 2,857
------- -------
Total mortgage loans on real estate 60,023 60,134
Commercial 715 808
Consumer installment loans 3,508 3,762
------- -------
Total loans 64,246 64,704
Less allowance for loan losses 772 816
------- -------
NET LOANS $63,474 $63,888
======= =======
Nonaccrual loans, loans otherwise considered impaired, and loans 90 days or
more past due, and interest income recognized on such loans, were not
significant at either December 31, 2005 or 2004, or for the years ended
December 31, 2005, 2004, or 2003.
4. ALLOWANCE FOR LOAN LOSSES
The following is an analysis of the changes in the allowance for loan
losses for the years ended December 31:
2005 2004 2003
---- ---- ----
BALANCE, BEGINNING OF YEAR $816 $823 $791
Loans charged off (61) (56) (43)
Recoveries 17 33 27
---- ---- ----
Net charge offs (44) (23) (16)
Provision for loan losses -- 16 48
---- ---- ----
BALANCE, END OF YEAR $772 $816 $823
==== ==== ====
70
THE FARWELL STATE SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
5. PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation of premises and
equipment is as follows at December 31:
2005 2004
------ ------
Land and improvements $ 95 $ 95
Buildings and improvements 612 605
Furniture and equipment 513 509
------ ------
Total 1,220 1,209
Less accumulated depreciation 892 878
------ ------
PREMISES AND EQUIPMENT, NET $ 328 $ 331
====== ======
Depreciation expense in 2005, 2004, and 2003 amounted to $34, $48, and $77,
respectively.
71
THE FARWELL STATE SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
6. DEPOSITS
The following is a summary of the distribution of deposits at December 31:
2005 2004
------- -------
INTEREST BEARING
Money market and NOW accounts $11,323 $12,026
Savings 16,777 18,729
Time, $100,000 and over 10,720 7,570
Other time 25,919 26,021
------- -------
Total interest bearing 64,739 64,346
Non-interest bearing demand 9,639 8,541
------- -------
TOTAL $74,378 $72,887
======= =======
Interest expense on time deposits issued in denominations of $100,000 or
more was $352 in 2005, $223 in 2004, and $237 in 2003.
Scheduled maturities of time deposits for the years succeeding December 31,
2005 are as follows:
2006 $15,873
2007 6,809
2008 3,473
2009 4,896
2010 5,588
-------
TOTAL $36,639
=======
7. INCOME TAXES
The provision for income taxes consists of the following components for the
years ended December 31:
2005 2004 2003
---- ---- ----
Currently payable $607 $828 $785
Deferred taxes (benefit) 14 (96) 3
---- ---- ----
FEDERAL INCOME TAXES $621 $732 $788
==== ==== ====
72
THE FARWELL STATE SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
A reconciliation between federal income tax expense and the amount computed
by applying the statutory federal income tax rate of 34% to income before
federal income taxes at December 31, follows:
2005 2004 2003
----- ---- -----
Tax at statutory rate $ 737 $807 $ 849
Effect of tax-exempt interest income (9) (72) (206)
Other - net (107) (3) 145
----- ---- -----
FEDERAL INCOME TAXES $ 621 $732 $ 788
===== ==== =====
The components of the net deferred tax liability at December 31 included
with other liabilities in the accompanying balance sheets, are primarily
related to temporary basis differences in premises and equipment and the
allowance for loan losses and are not significant.
8. RETIREMENT PLAN
Farwell maintains a non-leveraged Employee Stock Ownership Plan (ESOP) with
a 401(k) provision. Substantially all employees of Farwell are covered
under the plan. Farwell contributed 15 percent, the maximum allowed under
the Internal Revenue Code, of employee gross earnings during 2005 and 2004
and 2003. The cost of the plan amounted to $92, $90, and $86 in 2005, 2004,
and 2003, respectively. Total shares outstanding related to the ESOP for
each of the three years ended December 31, 2005 were 26,582 and were
included in the computation of dividends and earnings per share in each of
the respective years.
9. SUPPLEMENTAL CASH FLOWS INFORMATION
NON-CASH INVESTING ACTIVITIES
During 2005 and 2004, collateral repossessed on loans in the amount of $182
and $146, respectively, was reclassified as other real estate owned.
OTHER CASH FLOWS INFORMATION
Cash paid during the years ended December 31 for interest and income taxes
amounted to the following:
2005 2004 2003
------ ------ ------
Interest $1,462 $1,218 $1,529
====== ====== ======
Income taxes $ 657 $ 828 $ 785
====== ====== ======
73
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
10. RELATED PARTY TRANSACTIONS
LOANS
In the ordinary course of business, Farwell has granted loans to certain
directors, executive officers and their affiliates amounting to
approximately $249 and $343 at December 31, 2005 and 2004. During the year
ended December 31, 2005, total principal additions were approximately $190
and total principal payments were approximately $284.
DEPOSITS
Deposits of Bank directors, executive officers and their affiliates were
approximately $1,109,806 and $525,930 at December 31, 2005 and 2004,
respectively.
OTHER
Consulting fees in the amount of $73 and $65 at December 31, 2005 and 2004,
respectively, have been accrued and are payable to a Board member.
11. OFF-BALANCE SHEET ACTIVITIES
CREDIT-RELATED FINANCIAL INSTRUMENTS
Farwell is a party to credit related financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include
commitments to extend credit, standby letters of credit and commercial
letters of credit. Such commitments involve, to varying degrees, elements
of credit and interest rate risk in excess of the amount recognized in the
balance sheets. Farwell's exposure to credit loss is represented by the
contractual amount of these commitments. Farwell follows the same credit
policy in making commitments, including collateral, as it does for
on-balance-sheet instruments; no significant losses are anticipated as a
result of these commitments.
At December 31, 2005 and 2004, the following financial instruments were
outstanding whose contract amounts represent credit risk:
CONTRACT AMOUNT
---------------
2005 2004
---- ----
Unfunded commitments under lines of credit $336 $609
Commitments to grant loans 877 261
Commercial and standby letters of credit 53 50
74
THE FARWELL STATE SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. The commitments may expire
without being drawn upon. Therefore, the total commitment amounts do not
necessarily represent future cash requirements. The amount of collateral
obtained, if it is deemed necessary by Farwell, is based on management's
credit evaluation of the customer.
Unfunded commitments under commercial lines-of-credit, revolving credit
lines, equity lines-of-credit, and overdraft protection agreements are
commitments for possible future extensions of credit to existing customers.
These lines-of-credit are uncollateralized and usually do not contain a
specified maturity date and may not be drawn upon to the total extent to
which Farwell is committed.
Commercial and standby letters-of-credit are conditional commitments issued
by Farwell to guarantee the performance of a customer to a third party.
Those letters-of-credit are primarily issued to support public and private
borrowing arrangements. Essentially all letters-of-credit issued have
expiration dates within one year. The credit risk involved in issuing
letters-of-credit is essentially the same as that involved in extending
loan facilities to customers. Farwell generally holds collateral supporting
those commitments if deemed necessary.
12. REGULATORY REQUIREMENTS
CAPITAL REQUIREMENTS
Farwell is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators, that if undertaken, could have a
direct material effect on Farwell's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, Farwell must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities, capital and certain
off-balance-sheet items as defined in the regulations and calculated under
regulatory accounting practices. The capital amounts and classification are
also subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
Quantitative measurements established by regulation to ensure capital
adequacy require Farwell to maintain minimum amounts and ratios (set forth
in the following table) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted asset (as defined) and Tier 1 capital to
average assets (as defined). Management believes, as of December 31, 2005
and 2004, that Farwell met all capital adequacy requirements to which it is
subject.
75
THE FARWELL STATE SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
As of December 31, 2005, the most recent notification from the Federal
Deposit Insurance Corporation categorized Farwell as well capitalized under
the regulatory framework for prompt corrective action. To be categorized as
well capitalized, an institution must maintain minimum total risk-based,
Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following
tables. There are no conditions or events since the notification that
management believes have changed Farwell's category. Farwell's actual
capital amounts and ratios as of December 31, 2005 and 2004 are also
presented in the table.
MINIMUM
TO BE WELL
CAPITALIZED
MINIMUM UNDER PROMPT
CAPITAL CORRECTIVE
ACTUAL REQUIREMENTS ACTION PROVISIONS
--------------- -------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------ ----- ------ -----
DECEMBER 31, 2005
Total Capital to Risk Weighted Assets $14,244 29.9% $3,814 8.0% $4,767 10.0%
Tier 1 Capital to Risk Weighted Assets 13,646 28.6 1,907 4.0 2,860 6.0
Tier 1 Capital to Average Assets 13,646 15.1 3,610 4.0 4,512 5.0
DECEMBER 31, 2004
Total Capital to Risk Weighted Assets $15,583 32.8% $3,801 8.0% $4,751 10.0%
Tier 1 Capital to Risk Weighted Assets 14,986 31.5 1,900 4.0 2,850 6.0
Tier 1 Capital to Average Assets 14,986 16.5 3,636 4.0 4,545 5.0
RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS
Farwell is required by regulatory agencies to maintain legal cash reserves
based on the level of certain customer deposits. Required reserve balances
were $292 and $352 at December 31, 2005 and 2004, respectively.
76
THE FARWELL STATE SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
13. CONTINGENCIES
LITIGATION
Farwell is party to litigation arising during the normal course of
business. In the opinion of management, based on consultation with legal
counsel, the resolution of such litigation is not expected to have a
material effect on the financial statements.
ENVIRONMENTAL ISSUES
As a result of acquiring real estate from foreclosure proceedings, Farwell
is subject to potential claims and possible legal proceedings involving
environmental matters. No such claims have been asserted as of December 31,
2005.
14. SUBSEQUENT EVENT
On December 22, 2005, The Farwell State Savings Bank signed a definitive
agreement to be acquired by IBT Bancorp, Inc. (the "Agreement"). The
Agreement was amended and restated effective May 2, 2006 to provide for the
merger of Farwell with and into Farmers State Bank of Breckenridge, a
wholly-owned subsidiary of IBT Bancorp, Inc. The acquisition is subject to
regulatory approval.
* * * * *
77
FARWELL UNAUDITED CONDENSED FINANCIAL STATEMENTS FOR THE THREE-MONTH PERIOD
ENDED MARCH 31, 2006
THE FARWELL STATE SAVINGS BANK
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 31, DECEMBER 31
2006 2005
----------- -----------
(UNAUDITED)
ASSETS
Cash and due from banks $ 1,818 $ 1,720
Federal funds sold 5,429 3,232
------- -------
CASH AND CASH EQUIVALENTS 7,247 4,952
Securities available for sale 18,241 17,923
Loans, net of allowance for loan losses of $738 and $772 63,239 63,474
Premises and equipment, net 324 328
Accrued interest receivable 424 425
Other assets 2,075 2,040
------- -------
TOTAL ASSETS $91,550 $89,142
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
DEPOSITS
Noninterest-bearing $10,310 $ 9,639
Interest-bearing 66,478 64,739
------- -------
TOTAL DEPOSITS 76,818 74,378
Accrued interest payable and other liabilities 1,031 1,209
------- -------
TOTAL LIABILITIES 77,819 75,587
------- -------
STOCKHOLDERS' EQUITY
Common stock, $10 par value; 262,500 shares authorized,
Issued, and outstanding 2,625 2,625
Additional paid in capital 2,625 2,625
Retained earnings 8,584 8,396
Accumulated other comprehensive loss (103) (91)
------- -------
TOTAL STOCKHOLDERS' EQUITY 13,731 13,555
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $91,550 $89,142
======= =======
78
THE FARWELL STATE SAVINGS BANK
CONDENSED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
THREE-MONTHS ENDED
MARCH 31,
--------------------
2006 2005
------ -----------
(UNAUDITED)
INTEREST AND DIVIDEND INCOME
Loans, including fees $1,031 $1,032
Debt securities:
Taxable 69 39
Tax-exempt 82 89
Federal funds sold 47 28
------ ------
TOTAL INTEREST AND DIVIDEND INCOME 1,229 1,188
INTEREST EXPENSE ON DEPOSITS 400 336
------ ------
NET INTEREST INCOME 829 852
------ ------
NONINTEREST INCOME
Service charges on deposit accounts 52 46
Other 24 23
------ ------
TOTAL NONINTEREST INCOME 76 69
------ ------
NONINTEREST EXPENSES
Compensation and benefits 225 213
Occupancy and equipment 35 32
Other 189 143
------ ------
TOTAL NONINTEREST EXPENSES 449 388
------ ------
INCOME BEFORE FEDERAL INCOME TAXES 456 533
Federal incomes taxes 136 172
------ ------
NET INCOME $ 320 $ 361
====== ======
NET INCOME PER BASIC SHARE OF COMMON STOCK $ 1.22 $ 1.38
====== ======
STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
THREE-MONTHS ENDED
MARCH 31,
-------------------
2006 2005
----- -----------
(UNAUDITED)
Available-for-sale securities unrealized holding
losses arising during the quarter ($19) $(153)
Income tax benefit related to comprehensive loss (6) (52)
----- -----
OTHER COMPREHENSIVE LOSS (13) (101)
Net income 320 361
----- -----
COMPREHENSIVE INCOME $ 307 $ 260
===== =====
79
THE FARWELL STATE SAVINGS BANK
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE TOTAL
---------------- PAID IN RETAINED INCOME STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS (LOSS) EQUITY
------- ------ ---------- -------- ------------- -------------
BALANCES, JANUARY 1, 2005 262,500 $2,625 $2,625 $9,736 $ 13 $14,999
Comprehensive income -- -- -- 361 (101) 260
Cash dividends paid
($0.50 per share) -- -- -- (131) -- (131)
------- ------ ------ ------ ------ -------
BALANCES, MARCH 31, 2005 262,500 $2,625 $2,625 $9,966 ($88) $15,128
======= ====== ====== ====== ====== =======
BALANCES, JANUARY 1, 2006 262,500 $2,625 $1,625 $8,396 ($91) $13,555
Comprehensive income -- -- -- 320 (13) 307
Cash dividends paid
($0.50 per share) -- -- -- (131) -- (131)
------- ------ ------ ------ ------ -------
BALANCES, MARCH 31, 2006 262,500 $2,625 $2,625 $8,584 ($104) $13,731
======= ====== ====== ====== ====== =======
80
THE FARWELL STATE SAVINGS BANK
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
MARCH 31,
------------------
2006 2005
------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 320 $ 361
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation 8 9
Net amortization of investments 30 44
Decrease in deferred taxes -- 56
Decrease(increase) in bank owned life insurance 9 (9)
Changes in operating assets and liabilities which
provided (used) cash:
Accrued interest receivable 1 (53)
Other assets (38) (89)
Accrued interest payable and other liabilities (178) (175)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 152 144
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available-for-sale securities:
Purchases (1,624) (1,534)
Maturities, prepayments and calls 1,257 1,410
Loan principal collections and (originations), net 235 (294)
Additions to premises and equipment (4) --
------- -------
NET CASH USED IN INVESTING ACTIVITIES (136) (418)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest bearing deposits 671 160
Net increase in interest bearing deposits 1,739 2,994
Cash dividends paid on common stock (131) (131)
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,279 3,023
------- -------
Net increase in cash and cash equivalents 2,295 2,749
Cash and cash equivalents, beginning of period 4,952 4,169
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,247 $ 6,918
======= =======
81
CERTAIN BENEFICIAL OWNERS OF IBT COMMON STOCK
The following table sets forth, to the best knowledge and belief of IBT, certain
information regarding the beneficial ownership of IBT common stock as of April
29, 2006, by (i) each person known to IBT to be the beneficial owner of more
than 5% of the IBT common stock; (ii) each director and certain named officers
of IBT; and (iii) all of IBT's directors and officers as a group.
NUMBER OF SHARES OF COMMON PERCENT OF ALL COMMON
NAME OF BENEFICIAL OWNER STOCK BENEFICIALLY OWNED STOCK OUTSTANDING
------------------------ -------------------------- ---------------------
FIVE PERCENT OR MORE OWNERS
James J. McGuirk 372,163 6.79%
P.O. Box 222
Mt. Pleasant, Michigan 48858
DIRECTORS AND EXECUTIVE OFFICERS
Dennis P. Angner** 13,820 *
Richard J. Barz** 16,777 *
Sandra L. Caul 8,817 *
James C. Fabiano 229,704 4.18%
David W. Hole 20,668 *
David J. Maness 505 *
W. Joseph Manifold 285 *
Timothy M. Miller 3,145 *
Ronald E. Schumacher 13,571 *
William J. Strickler 74,014 1.35%
Dale D. Weburg 52,271 *
All directors and executive officers as a group (11) persons 433,577 7.91%
* Less than 1%
** Trustees of the ESOP who vote ESOP shares.
OTHER MATTERS
As of the date of this document, Farwell's Board of Directors knows of no
matters that will be presented for consideration at its special meeting other
than as described in this document. However, if any other matter shall properly
come before this special meeting or any adjournment or postponement thereof and
shall be voted upon, the proposed proxy will be deemed to confer authority to
the individuals named as authorized therein to vote the shares represented by
the proxy as to any matters that fall within the purposes set forth in the
notice of special meeting.
FARWELL ANNUAL MEETING
Farwell intends to reschedule its 2006 Annual Meeting of shareholders to the
morning of _______________, 2006.
WHERE YOU CAN FIND MORE INFORMATION
IBT has filed a registration statement on Form S-4 to register with the SEC the
offering of IBT common stock to be issued by IBT in the merger. This proxy
statement-prospectus is a part of that registration statement. As allowed by SEC
rules, this proxy statement-prospectus does not contain all of the information
contained in the registration statement or the exhibits to the registration
statement. This means that this proxy-statement prospectus incorporates
important business and financial information about IBT that is not included in
or delivered with this document.
IBT is subject to the informational requirements of the Securities Exchange Act
of 1934, as amended. Accordingly, IBT files annual, quarterly, and current
reports, proxy statements, and other information with the SEC. You may read and
copy any reports, statements, or other information that we file at the SEC's
Public Reference Room at 450 Fifth Street N.W., Washington, D.C. 20549. You may
call the SEC at 1-800-SEC-0330 for further information on the operation of the
Public Reference Room. IBT's SEC filings are also available to the public from
commercial document retrieval services and at the website maintained by the SEC
at www.sec.gov. The website contains reports, proxy and information statements,
and other information regarding companies that file electronically with the SEC.
The SEC allows IBT to incorporate by reference information into this proxy
statement-prospectus. This means that IBT can disclose
82
important information by referring to another document filed separately with the
SEC. The information incorporated by reference is considered to be part of this
proxy statement-prospectus, except for any information superseded by information
in this proxy statement-prospectus. This proxy statement prospectus incorporates
by reference the documents set forth below that IBT has previously filed with
the SEC. These documents contain important information about IBT and its
finances.
IBT Commission Filings (File No. 000-18415)
Current Report on Form 8-K filed May 5, 2006
Quarterly Report on Form 10-Q for the three-month period ended March 31, 2006
Current Report on Form 8-K filed April 25, 2006
Current Report on Form 8-K filed March 28, 2006
Current Report on Form 8-K filed March 10, 2006
Definitive Proxy Statement on Schedule 14A filed March 28, 2006
Annual Report on Form 10-K for year ended December 31, 2005
All documents subsequently filed by IBT with the SEC pursuant to Sections 13(a),
13(c), 14 and 15 of the Securities Exchange Act of 1934, as amended, between the
date of this proxy statement-prospectus and the date of the special meeting of
the shareholders of Farwell are also incorporated by reference into this proxy
statement-prospectus.
Documents incorporated by reference are available from IBT without charge. You
may obtain documents incorporated by reference in this proxy
statement-prospectus by requesting them in writing or by telephone from IBT at
the following address:
IBT Bancorp, Inc.
Attn: Dennis P. Angner, President & Chief Executive Officer
200 East Broadway
Mt. Pleasant, Michigan 48858
(989) 772-9471
TO OBTAIN DELIVERY OF THIS INFORMATION PRIOR TO THE SPECIAL FARWELL SHAREHOLDERS
MEETING, YOU MUST REQUEST THE INFORMATION NO LATER THAN _______________, 2006,
WHICH IS FIVE BUSINESS DAYS BEFORE THE DATE OF THE SPECIAL MEETING AT WHICH YOU
ARE REQUESTED TO VOTE.
NEITHER IBT NOR FARWELL HAS AUTHORIZED ANYONE TO GIVE ANY INFORMATION OR MAKE
ANY REPRESENTATION ABOUT THE MERGER OR OUR COMPANIES THAT IS DIFFERENT FROM, OR
IN ADDITION TO, THAT CONTAINED IN THIS DOCUMENT OR IN ANY OF THE MATERIALS THAT
HAVE BEEN INCORPORATED INTO THIS DOCUMENT. THEREFORE, IF ANYONE DOES GIVE YOU
INFORMATION OF THIS SORT, YOU SHOULD NOT RELY ON IT. IF YOU ARE IN A
JURISDICTION WHERE OFFERS TO EXCHANGE OR SELL, OR SOLICITATIONS OF OFFERS TO
EXCHANGE OR PURCHASE, THE SECURITIES OFFERED BY THIS DOCUMENT OR THE
SOLICITATION OF PROXIES IS UNLAWFUL, OR IF YOU ARE A PERSON TO WHOM IT IS
UNLAWFUL TO DIRECT THESE TYPES OF ACTIVITIES, THEN THE OFFER PRESENTED IN THIS
DOCUMENT DOES NOT EXTEND TO YOU. THE INFORMATION CONTAINED IN THIS DOCUMENT
SPEAKS ONLY AS OF THE DATE OF THIS DOCUMENT UNLESS THE INFORMATION SPECIFICALLY
INDICATES THAT ANOTHER DATE APPLIES.
FORWARD-LOOKING STATEMENTS
This document, including information included or incorporated by reference in
this document may contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements include, but are not limited to:
(i) the financial condition, results of operations and business of IBT and
Farwell;
(ii) statements about the benefits of the merger, including future financial and
operating results, cost savings, enhancements to revenue and accretion to
reported earnings that may be realized from the merger;
(iii) statements about our respective plans, objectives, expectations and
intentions and other statements that are not historical facts; and
(iv) other statements identified by words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," or words of similar
meaning. These forward-looking statements are based on current beliefs and
expectations of our management and are inherently subject to significant
business, economic and competitive uncertainties and contingencies, many of
which are beyond our control. In addition, these forward-looking statements are
subject to assumptions with respect to future business strategies and decisions
that are subject to change. The following factors, among others, could cause
actual results to differ materially from the anticipated results or other
83
expectations expressed in the forward-looking statements:
- general economic conditions in the areas in which we operate;
- our businesses may not be combined successfully, or such combination may
take longer to accomplish than expected;
- delays or difficulties in the integration by IBT of recently acquired
businesses;
- the growth opportunities and cost savings from the merger may not be fully
realized or may take longer to realize than expected;
- operating costs, customer losses and business disruption following the
merger, including adverse effects of relationships with employees, may be
greater than expected;
- governmental approvals of the merger may not be obtained, or adverse
regulatory conditions may be imposed in connection with governmental
approvals of the merger;
- adverse governmental or regulatory policies may be enacted;
- the interest rate environment may change, causing margins to compress and
adversely affecting net interest income;
- the risks associated with continued diversification of assets and adverse
changes to credit quality;
- competition from other financial services companies in our markets;
- the concentration of IBT's operations in Michigan may adversely affect
results if the Michigan economy or real estate market declines; and
- the risk of an economic slowdown that would adversely affect credit quality
and loan originations.
Additional factors that could cause actual results to differ materially from
those expressed in the forward-looking statements are discussed in IBT's reports
filed with the Securities and Exchange Commission.
All subsequent written and oral forward-looking statements concerning the
proposed transaction or other matters attributable to either of us or any person
acting on our behalf are expressly qualified in their entirety by the cautionary
statements above. Neither of us undertake any obligation to update any
forward-looking statement to reflect circumstances or events that occur after
the date the forward-looking statements are made.
84
APPENDIX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
DATED AS OF MAY 2, 2006
TABLE OF CONTENTS
ARTICLE I - CERTAIN DEFINITIONS............................................ A-3
1.1. CERTAIN DEFINITIONS.............................................. A-3
ARTICLE II - THE MERGER.................................................... A-9
2.1. MERGER........................................................... A-9
2.2. CLOSING; EFFECTIVE TIME.......................................... A-9
2.3. ARTICLES OF INCORPORATION AND BYLAWS; NAME....................... A-9
2.4. DIRECTORS AND OFFICERS OF SURVIVING CORPORATION.................. A-9
2.5. EFFECTS OF THE MERGER............................................ A-10
2.6. TAX CONSEQUENCES................................................. A-10
2.7. POSSIBLE ALTERNATIVE STRUCTURES.................................. A-10
ARTICLE III - CONVERSION OF SHARES......................................... A-10
3.1. CONVERSION OF FSSB COMMON STOCK; MERGER CONSIDERATION............ A-10
3.2. PROCEDURES FOR EXCHANGE OF FSSB COMMON STOCK..................... A-12
3.3. RESERVATION OF SHARES............................................ A-14
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF FSSB........................ A-14
4.1. REPRESENTATIONS AND WARRANTIES OF FSSB........................... A-14
ARTICLE V - REPRESENTATIONS AND WARRANTIES OF FARMERS ..................... A-27
5.1. REPRESENTATIONS AND WARRANTIES OF FARMERS........................ A-27
ARTICLE VI - COVENANTS OF FSSB............................................. A-37
6.1. CONDUCT OF BUSINESS.............................................. A-37
6.2. CURRENT INFORMATION.............................................. A-40
6.3. ACCESS TO PROPERTIES AND RECORDS................................. A-40
6.4. FINANCIAL AND OTHER STATEMENTS................................... A-41
6.5. MAINTENANCE OF INSURANCE......................................... A-41
6.6. DISCLOSURE SUPPLEMENTS........................................... A-42
6.7. CONSENTS AND APPROVALS OF THIRD PARTIES.......................... A-42
6.8. ALL REASONABLE EFFORTS........................................... A-42
6.9. FAILURE TO FULFILL CONDITIONS.................................... A-42
6.10. NO SOLICITATION.................................................. A-42
6.11. SARBANES-OXLEY CERTIFICATION OF FINANCIAL STATEMENTS............. A-43
6.12 FSSB AUDIT FOR 2005.............................................. A-43
ARTICLE VII - COVENANTS OF FARMERS ........................................ A-43
7.1. CONDUCT OF BUSINESS.............................................. A-43
7.2. DISCLOSURE SUPPLEMENTS........................................... A-44
7.3. CONSENTS AND APPROVALS OF THIRD PARTIES.......................... A-44
7.4. ALL REASONABLE EFFORTS........................................... A-44
7.5. FAILURE TO FULFILL CONDITIONS.................................... A-44
7.6. EMPLOYEE BENEFITS................................................ A-44
7.7. ACCESS TO PROPERTIES AND RECORDS................................. A-45
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7.8. FINANCIAL AND OTHER STATEMENTS................................... A-45
7.9. DIRECTORS AND OFFICERS INDEMNIFICATION; INSURANCE................ A-45
ARTICLE VIII - REGULATORY AND OTHER MATTERS................................ A-47
8.1. MEETINGS OF SHAREHOLDERS......................................... A-47
8.2. PROXY STATEMENT--PROSPECTUS; MERGER REGISTRATION STATEMENT....... A-47
8.3. REGULATORY APPROVALS............................................. A-48
8.4. AFFILIATES....................................................... A-48
8.5. EMPLOYMENT AGREEMENT............................................. A-49
8.6. POST-CLOSING OPERATIONS.......................................... A-49
ARTICLE IX - CLOSING CONDITIONS............................................ A-49
9.1. CONDITIONS TO EACH PARTY'S OBLIGATIONS UNDER THIS AGREEMENT...... A-49
9.2. CONDITIONS TO THE OBLIGATIONS OF FARMERS UNDER THIS AGREEMENT.... A-50
9.3. CONDITIONS TO THE OBLIGATIONS OF FSSB UNDER THIS AGREEMENT....... A-51
ARTICLE X - THE CLOSING.................................................... A-52
10.1. TIME AND PLACE................................................... A-52
10.2. DELIVERIES AT THE CLOSING........................................ A-52
ARTICLE XI - TERMINATION, AMENDMENT AND WAIVER............................. A-52
11.1. TERMINATION...................................................... A-52
11.2. EFFECT OF TERMINATION............................................ A-53
11.3. AMENDMENT, EXTENSION AND WAIVER.................................. A-54
ARTICLE XII - MISCELLANEOUS................................................ A-54
12.1. CONFIDENTIALITY.................................................. A-54
12.2. PUBLIC ANNOUNCEMENTS............................................. A-55
12.3. SURVIVAL......................................................... A-55
12.4. NOTICES.......................................................... A-55
12.5. PARTIES IN INTEREST.............................................. A-56
12.6. COMPLETE AGREEMENT............................................... A-56
12.7. COUNTERPARTS..................................................... A-56
12.8. SEVERABILITY..................................................... A-57
12.9. GOVERNING LAW.................................................... A-57
12.10. INTERPRETATION................................................... A-57
12.11. SPECIFIC PERFORMANCE............................................. A-57
A-ii
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
This Amended and Restated Agreement and Plan of Merger is dated as of May
2, 2006 (the "Agreement"), by and between Farmers State Bank of Breckenridge, a
Michigan chartered commercial bank ("Farmers"), The Farwell State Savings Bank,
a Michigan chartered commercial bank ("FSSB") and IBT Bancorp, Inc., a Michigan
financial services holding company ("IBT").
WHEREAS, FSSB and IBT, the parent corporation of Farmers, entered into an
Agreement and Plan of Merger dated December 22, 2005;
WHEREAS, pursuant to Section 2.7 of the Agreement and Plan of Merger dated
December 22, 2005, the parties now desire to modify certain terms and conditions
of the Agreement as more particularly provided in this amended and restated
Agreement, including but not limited to substituting Farmers for IBT as the
acquiring entity;
WHEREAS, the Board of Directors of each of Farmers and FSSB (i) has
determined that this Agreement and the business combination and related
transactions contemplated hereby are in the best interests of their respective
companies and shareholders and (ii) has determined that this Agreement and the
transactions contemplated hereby are consistent with and in furtherance of their
respective business strategies, and (iii) has approved this Agreement at
meetings of each of such Boards of Directors;
WHEREAS, in accordance with the terms of this Agreement, FSSB will merge
with Farmers with Farmers as the surviving entity (the "Merger"). Concurrently,
shareholders of FSSB shall exchange their shares of FSSB for shares of IBT and
cash;
WHEREAS, the parties currently intend that the Merger shall qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"); and
WHEREAS, the parties desire to make certain representations, warranties and
agreements in connection with the business transactions described in this
Agreement and to prescribe certain conditions thereto.
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements herein contained, and of other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
ARTICLE I - CERTAIN DEFINITIONS
1.1. Certain Definitions. As used in this Agreement, the following terms
have the following meanings (unless the context otherwise requires, references
to articles and sections refer to articles and sections of this Agreement).
A-3
"Affiliates" means any Person who directly, or indirectly, through one or
more intermediaries, controls, or is controlled by, or is under common control
with, such Person and, without limiting the generality of the foregoing,
includes any executive officer or director of such Person and any Affiliates of
such executive officer or director.
"Agreement" means this agreement, and any amendment hereto.
"Bank Regulator" shall mean any Federal or state banking regulatory agency
with supervisory authority over Farmers, FSSB, IBT, Isabella Bank and Trust, or
a subsidiary of any of them.
"Bureau" shall mean the Office of Financial and Insurance Services of the
State of Michigan.
"Certificate" shall mean a certificate evidencing shares of FSSB Common
Stock.
"Closing" shall have the meaning set forth in Section 2.2.
"Closing Date" shall have the meaning set forth in Section 2.2.
"COBRA" shall mean the Consolidated Omnibus Budget Reconciliation Act of
1985, as amended.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Confidentiality Agreements" shall mean the confidentiality agreements
referred to in Section 12.1 of this Agreement.
"Dissenting Shareholder" shall have the meaning set forth in Section
3.1(d).
"Dissenting Shares" shall have the meaning set forth in Section 3.1(d).
"Effective Time" shall mean the date and time specified pursuant to Section
2.2 hereof as the effective time of the Merger.
"Environmental Laws" means any applicable Federal, state or local law,
statute, ordinance, rule, regulation, code, license, permit, authorization,
approval, consent, order, judgment, decree, injunction or agreement with any
governmental entity relating to (1) the protection, preservation or restoration
of the environment (including, without limitation, air, water vapor, surface
water, groundwater, drinking water supply, surface soil, subsurface soil, plant
and animal life or any other natural resource) and/or (2) the use, storage,
recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of Materials of Environmental Concern.
The term "Environmental Laws" includes without limitation (a) the comprehensive
Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C.
Section 9601, et seq.; the resource Conservation and Recovery Act, as amended,
42 U.S.C. Section 901, et seq.; the Clean Air Act, as amended, 42 U.S.C. Section
7401, et seq.; the Federal Water Pollution Control Act, as amended, 33 U.S.C.
Section 1251, et seq.; the Toxic
A-4
Substances Control Act, as amended, 15 U.S.C. Section 2601, et seq.; the
Emergency Planning and Community Right to Know Act, 42 U.S.C. Section 11001, et
seq.; the Safe Drinking Water Act, 42 U.S.C. Section 300f, et seq.; and all
comparable state and local laws, and (b) any common law (including without
limitation common law that may impose strict liability) that may impose
liability or obligations for injuries or damages due to the presence of or
exposure to any Materials of Environmental Concern.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Exchange Agent" shall mean Isabella Bank and Trust, or such other bank or
trust company or other agent designated by Farmers, and reasonably acceptable to
FSSB, which shall act as agent for Farmers in connection with the exchange of
the Certificates for the Merger Consideration.
"Exchange Fund" shall have the meaning set forth in Section 3.2(a).
"Exchange Ratio" shall mean the number of shares IBT Common Stock and the
amount of cash into which one (1) share of FSSB Common Stock shall be converted
at the Effective Time, which shall be as set forth below:
3.0382 shares of IBT Common Stock plus $29.00 in cash for each share
of FSSB Common Stock, provided that the cash portion shall be reduced
by the amount that cash dividends paid by FSSB during 2006 exceed
$3.50 per share and shall be increased by the amount that cash
dividends paid by IBT during 2006 exceed $0.66 per share.
"Farmers" shall mean Farmers State Bank of Breckenridge, with its principal
offices located at 316 East Saginaw Street, Breckenridge, Michigan 48615.
"Farmers Entity Disclosure Schedule" shall mean a written disclosure
schedule delivered by Farmers and IBT to FSSB specifically referring to the
appropriate section of this Agreement.
"Farmers Entity" shall mean any of Farmers, IBT, Isabella Bank and Trust,
IBT Title and Insurance Agency, Inc., Financial Group Information Services,
Inc., IB&T Employee Leasing, LLC, and IBT Personnel, LLC.
"FDIC" shall mean the Federal Deposit Insurance Corporation or any
successor thereto.
"FRB" shall mean the Board of Governors of the Federal Reserve System or
any successor thereto.
"FSSB" shall mean The Farwell State Savings Bank, with its principal
offices located at 399 West Main Street, Farwell, Michigan 48622.
A-5
"FSSB Common Stock" shall mean the common stock, par value $10.00 per
share, of FSSB.
"FSSB Disclosure Schedule" shall mean a written disclosure schedule
delivered by FSSB to IBT specifically referring to the appropriate section of
this Agreement.
"FSSB Financial Statements" shall mean (i) the audited statements of
financial condition (including related notes and schedules, if any) of FSSB as
of December 31, 2005, 2004 and 2003 and the statements of income, changes in
shareholders' equity and cash flows (including related notes and schedules, if
any) of FSSB for each of the three years ended December 31, 2005, 2004 and 2003,
as set forth in FSSB's annual report for the year ended December 31, 2004 and
(ii) the unaudited interim consolidated financial statements of FSSB as of the
end of the three-month period ended March 31, 2006.
"FSSB Shareholders Meeting" shall have the meaning set forth in Section
8.1.
"FSSB Stock Benefit Plans" shall mean any and all stock-based benefit plans
and amendments thereto of FSSB.
"FSSB Subsidiary" means any corporation or entity, 50% or more of the
equity interest of which is owned, either directly or indirectly, by FSSB,
except any corporation or entity the equity interest of which is held in the
ordinary course of the lending activities of FSSB.
"GAAP" shall mean accounting principles generally applied in the United
States of America.
"Governmental Entity" shall mean any Federal or state court, administrative
agency or commission or other governmental authority or instrumentality.
"IBT" shall mean IBT Bancorp, Inc., a Michigan corporation, with its
principal executive offices located at 200 East Broadway Street, Mt. Pleasant,
Michigan, 48858.
"IBT Common Stock" shall mean the common stock, no par value per share, of
IBT.
"IBT Financial Statements" shall mean the (i) the audited consolidated
statements of financial condition (including related notes and schedules) of IBT
as of December 31, 2005, 2004 and 2003 and the consolidated statements of
income, changes in shareholders' equity and cash flows (including related notes
and schedules, if any) of IBT for each of the three years ended December 31,
2005, 2004 and 2003, as set forth in IBT's annual report for the year ended
December 31, 2005, and (ii) the unaudited interim consolidated financial
statement of IBT as of the end of the three-month period ended March 31, 2006,
as filed by IBT in its Securities Documents.
"IBT Stock Benefit Plans" shall mean any and all stock-based benefit plans
and amendments thereto of IBT.
A-6
"IBT Subsidiary" means any corporation or entity, 50% or more of the equity
interest of which is owned, either directly or indirectly, by IBT, Isabella Bank
and Trust or Farmers, except any corporation or entity, the equity interest of
which is held in the ordinary course of the lending activities of Isabella Bank
and Trust or Farmers.
"IRS" shall mean the United States Internal Revenue Service.
"Knowledge" as used with respect to a Person (including references to such
person being aware of a particular matter) means those facts that are known by
the current executive officers and directors of such Person, and includes any
and all facts, matters or circumstances set forth in any written notice from any
Bank Regulator or any other material written notice received by such executive
officer or director of that Person.
"Loan Property" shall have the meaning set forth in Section 4.1(o).
"Material Adverse Effect" shall mean, with respect to Farmers or FSSB,
respectively, any effect that (i) is material and adverse to the financial
condition, results of operations or business of IBT and its Subsidiaries taken
as a whole, or FSSB and its Subsidiaries taken as a whole, respectively, or (ii)
does or would materially impair the ability of either FSSB, on the one hand, or
Farmers, on the other hand, to perform its obligations under this Agreement or
otherwise materially threaten or materially impede the consummation of the
transactions contemplated by this Agreement; provided that "Material Adverse
Effect" shall not be deemed to include the impact of (a) changes in laws and
regulations affecting banks generally or interpretations thereof by courts or
governmental agencies, (b) changes in GAAP or regulatory accounting principles
generally applicable to financial institutions and their holding companies, (c)
actions and omissions of a party hereto (or any of its Subsidiaries) taken with
the prior written consent of the other party, (d) compliance with this Agreement
on the business, financial condition or results of operations of the parties and
their respective Subsidiaries, including the expenses incurred by the parties
hereto in consummating the transactions contemplated by this Agreement
(consistent with the information included in the Disclosure Schedules) and (e)
any change in the value of the securities portfolio of IBT or FSSB,
respectively, whether held as available for sale or held to maturity, resulting
from a change in interest rates value of the securities portfolio of IBT or
FSSB, respectively, whether held as available for sale or held to maturity,
resulting from a change in interest rates generally.
"Materials of Environmental Concern" means pollutants, contaminants,
wastes, toxic substances, petroleum and petroleum products, and any other
materials regulated under Environmental Laws.
"MBCA" shall mean the Michigan Business Corporation Act, as amended.
"Merger" shall mean the merger of FSSB with and into Farmers pursuant to
the terms hereof.
"Merger Consideration" shall mean the IBT Common Stock and cash, to be paid
by Farmers for each share of FSSB Common Stock, as set forth in Section 3.1.
A-7
"Merger Registration Statement" shall mean the registration statement,
together with all amendments, filed with the SEC under the Securities Act for
the purpose of registering shares of IBT Common Stock to be offered to holders
of FSSB Common Stock in connection with the Merger.
"Michigan Banking Law" shall mean the Michigan Banking Code of 1999, as
amended, and the rules and regulations promulgated thereunder, as amended, as
administered by the Bureau.
"Participation Facility" shall have the meaning set forth in Section
4.1(o).
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any successor
thereto.
"Pension Plan" shall have the meaning set forth in Section 4.1(m).
"Person" shall mean any individual, corporation, limited liability company,
partnership, joint venture, association, trust "group" (as that term is defined
under the Exchange Act) or entity.
"Proxy Statement - Prospectus" shall have the meaning set forth in Section
8.2.
"Regulatory Agreement" shall have the meaning set forth in Section 4.1(l).
"Regulatory Approvals" means the approval of any Bank Regulator that is
necessary in connection with the consummation of the Merger and the related
transactions contemplated by this Agreement.
"Rights" shall mean warrants, options, rights, convertible securities,
stock appreciation rights and other arrangements or commitments which obligate
an entity to issue or dispose of any of its capital stock or other ownership
interests or which provide for compensation based on the equity appreciation of
its capital stock.
"SEC" shall mean the Securities and Exchange Commission or any successor
thereto.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Securities Documents" shall mean all reports, offering circulars, proxy
statements, registration statements and all similar documents filed pursuant to
the Securities Laws.
"Securities Laws" shall mean the Securities Act; the Exchange Act; the
Investment Company Act of 1940, as amended; the Investment Advisers Act of 1940,
as amended; the Trust Indenture Act of 1939, as amended, and the rules and
regulations of the SEC promulgated thereunder.
"Significant Subsidiary" shall have the meaning set forth in Rule 1-02 of
Regulation S-X of the SEC.
A-8
"Surviving Corporation" shall have the meaning set forth in Section 2.1
hereof.
"Termination Date" shall mean December 31, 2006.
Other terms used herein are defined in the preamble and elsewhere in this
Agreement.
ARTICLE II - THE MERGER
2.1. Merger. Subject to the terms and conditions of this Agreement, at the
Effective Time, FSSB shall merge with Farmers, with Farmers as the resulting or
surviving banking corporation (the "Surviving Corporation"). As part of the
Merger, each share of FSSB Common Stock shall be converted into the right to
receive the Merger Consideration pursuant to the terms of Article III hereof.
2.2. Closing; Effective Time. Subject to the satisfaction or waiver of all
conditions to closing contained in Article IX hereof, the Closing shall occur no
later than five (5) business days following the latest to occur of (i) the
receipt of all required Regulatory Approvals, and the expiration of any
applicable waiting periods, (ii) the approval of the Merger by the shareholders
of FSSB, or (iii) at such other date or time upon which Farmers and FSSB
mutually agree (the "Closing"). The Merger shall be effected by the filing of a
certificate of merger with the Bureau on the day of the Closing (the "Closing
Date"), in accordance with Michigan Banking Law. The "Effective Time" means the
date and time upon which the certificate of merger is filed with the Bureau, or
as otherwise stated in the certificate of merger, in accordance with Michigan
Banking Law.
2.3. Articles of Incorporation and Bylaws; Name. The Articles of
Incorporation and Bylaws of Farmers as in effect immediately prior to the
Effective Time shall be the Articles of Incorporation and Bylaws of the
Surviving Corporation, until thereafter amended as provided therein and by
applicable law. The name of the Surviving Corporation shall be FSB.
2.4. Directors and Officers of Surviving Corporation. The board directors
of the Surviving Corporation shall consist of one of the incumbent directors of
each of FSSB and Farmers immediately preceding the Effective Time, the President
and CEO of IBT and two outside directors of IBT, each to hold office in
accordance with the Articles of Incorporation and Bylaws of the Surviving
Corporation. At the Effective Time, IBT shall establish by resolution of the
Board of Directors a regional board to preserve the institutional knowledge of
FSSB immediately before the Merger and to provide advice to the IBT Board of
Directors about business and operations, community and customer needs in the
market area, regional economic conditions and such other advisory
responsibilities as determined by the IBT Board of Directors. The members of the
initial regional board shall consist of all incumbent members of the FSSB board
of directors immediately preceding the Effective Time. Regional board member
compensation shall be the same as that provided by FSSB prior to the Effective
Time provided, however, that IBT may conduct periodic reviews of director
compensation to assess reasonableness and consistency. The officers of the
Surviving Corporation at the Effective Time shall be as set forth in Exhibit F.
A-9
2.5. Effects of the Merger. At and after the Effective Time, the Merger
shall have the effects as set forth in the Michigan Banking Law.
2.6. Tax Consequences. It is intended that the Merger shall constitute a
reorganization within the meaning of Section 368(a) of the Code and that this
Agreement shall constitute a "plan of reorganization" as that term is used in
Sections 354 and 361 of the Code. From and after the date of this Agreement and
until the Closing, each party hereto shall use its reasonable best efforts to
cause the Merger to qualify, and will not knowingly take any action, cause any
action to be taken, fail to take any action or cause any action to fail to be
taken which action or failure to act could prevent the Merger from qualifying as
a reorganization under Section 368(a) of the Code other than is contemplated by
this Agreement. Following the Closing, neither Farmers nor FSSB nor any of their
Affiliates shall knowingly take any action, cause any action to be taken, fail
to take any action or cause any action to fail to be taken, which action or
failure to act could cause the Merger to fail to qualify as a reorganization
under Section 368(a) of the Code.
2.7. Possible Alternative Structures. Notwithstanding anything to the
contrary contained in this Agreement and subject to the satisfaction of the
conditions set forth in Article IX, prior to the Effective Time, Farmers shall,
with the consent of FSSB, which will not be unreasonably withheld, be entitled
to revise the structure of the Merger described in Section 2.1 hereof provided
that (i) there are no adverse Federal or state income tax consequences to FSSB
shareholders as a result of the modification; (ii) the consideration to be paid
to the holders of FSSB Common Stock under this Agreement is not thereby changed
in kind or value (or the composition thereof), or reduced in amount; and (iii)
such modification will not delay materially or jeopardize receipt of any
required Regulatory Approvals or other consents and approvals relating to the
consummation of the Merger. The parties hereto agree to appropriately amend this
Agreement and any related documents in order to reflect any such revised
structure.
ARTICLE III - CONVERSION OF SHARES
3.1. Conversion of FSSB Common Stock; Merger Consideration. At the
Effective Time, by virtue of the Merger and without any action on the part of
Farmers, FSSB or the holders of any of the shares of FSSB Common Stock, the
Merger shall be effected in accordance with the following terms:
(a) Each share of Farmers Common Stock that is issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding
following the Effective Time and shall be unchanged by the Merger.
(b) All shares of FSSB Common Stock held in the treasury of FSSB and
each share of FSSB Common Stock owned by IBT or any direct or indirect wholly
owned subsidiary of IBT or of FSSB immediately prior to the Effective Time,
shall cease to exist, and the certificates for such shares shall be canceled as
promptly as practicable thereafter, and no payment or distribution shall be made
in consideration therefor.
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(c) Except as set forth above, each share of FSSB Common Stock issued
and outstanding immediately prior to the Effective Time (other than Dissenting
Shares) shall become and be converted into, as provided in and subject to the
limitations set forth in this Agreement, the right to receive shares of IBT
Common Stock and cash based on the Exchange Ratio (the "Merger Consideration").
(d) Each outstanding share of FSSB Common Stock the holder of which
has perfected his right to dissent under Michigan Banking Law and has not
effectively withdrawn or lost such right as of the Effective Time (the
"Dissenting Shares") shall not be converted into or represent a right to receive
the Merger Consideration hereunder, and the holder thereof shall be entitled
only to such rights as are granted by Michigan Banking Law. FSSB shall give
Farmers prompt notice upon receipt by FSSB of any such demand for payment of the
fair value of such shares of FSSB Common Stock and of withdrawals of such
demands and any other instruments provided pursuant to applicable law (any
shareholder duly making such demand being hereinafter called a "Dissenting
Shareholder"), and Farmers shall have the right to participate in all
negotiations and proceedings with respect to any such demand for payment, or
waive any failure to timely deliver a written demand for appraisal or the taking
of any other action by such Dissenting Shareholder as may be necessary to
perfect appraisal rights under Michigan Banking Law. Any payments made with
respect to Dissenting Shares shall be made by the Surviving Corporation.
(e) If any Dissenting Shareholder shall effectively withdraw or lose
(through failure to perfect or otherwise) his right to payment as a Dissenting
Shareholder at or prior to the Effective Time, such holder's shares of FSSB
Common Stock shall be converted into a right to receive the Merger Consideration
in accordance with the applicable provisions of this Agreement.
(f) At the Effective Time, shares of FSSB Common Stock shall
automatically be canceled and shall no longer be outstanding, and shall be
converted into the right to receive the Merger Consideration.
(g) Notwithstanding anything to the contrary contained herein, no
certificates or script representing fractional shares of IBT Common Stock shall
be issued upon the surrender and exchange of Certificates, no dividend or
distribution with respect to IBT Common Stock shall be payable on or with
respect to any fractional share interest, and such fractional share interests
shall not entitle the owner thereof to vote or to any other rights of a
shareholder of IBT. In lieu of the issuance of any such fractional share,
Farmers shall pay to each former holder of FSSB Common Stock who otherwise would
be entitled to receive a fractional share of IBT Common Stock, an amount in
cash, rounded to the nearest cent and without interest, equal to the product of
(i) the fraction of a share to which such holder would otherwise have been
entitled and (ii) $42.00. For purposes of determining any fractional share
interest, all shares of FSSB Common Stock owned by a FSSB shareholder shall be
combined so as to calculate the maximum number of whole shares of IBT Common
Stock issuable to such FSSB Shareholder.
(h) In the event that, subsequent to the date of this Agreement but
prior to the Effective Time, the outstanding shares of IBT Common Stock and/or
FSSB Common Stock shall
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have been increased, decreased, changed into or exchanged for a different number
or kind of shares or securities through a reorganization, recapitalization,
reclassification, stock dividend, stock split, reverse stock split, or other
similar change in capitalization, or exchanged or converted into shares or
securities of another corporation, then an appropriate, equitable and
proportionate adjustment shall be made to the Exchange Ratio.
3.2. Procedures for Exchange of FSSB Common Stock.
(a) IBT to Make Merger Consideration Available. No later than the
Closing Date, IBT shall deposit, or shall cause to be deposited, in an account
with the Exchange Agent for the benefit of the holders of FSSB Common Stock, for
exchange in accordance with this Section 3.2, certificates representing the
shares of IBT Common Stock and an aggregate amount of cash sufficient to pay the
aggregate amount of cash payable pursuant to this Article III (such cash and
certificates for shares of IBT Common Stock, together with any dividends or
distributions with respect thereto (without any interest thereon) being
hereinafter referred to as the "Exchange Fund").
(b) Exchange of Certificates. IBT shall take any steps necessary to
cause the Exchange Agent, within five (5) business days after the Effective
Time, to mail to each holder of a Certificate or Certificates, a form letter of
transmittal for return to the Exchange Agent and instructions for use in
effecting the surrender of the Certificates in exchange for the Merger
Consideration. The letter of transmittal shall be in customary form and shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent. Upon proper surrender of a Certificate for exchange and cancellation to
the Exchange Agent, together with a properly completed letter of transmittal,
duly executed, the holder of such Certificate shall be entitled to receive in
exchange therefore the Merger Consideration to which such holder of FSSB Common
Stock shall have become entitled pursuant to Section 3.1(c) and 3.1(g) hereof,
and the Certificate so surrendered shall forthwith be cancelled. No interest
will be paid or accrued on any cash payable hereunder or any unpaid dividends
and distributions, if any, payable to holders of Certificates.
(c) Rights of Certificate Holders After the Effective Time. After the
Effective Time, the holders of the Certificates shall have no rights (excluding
dissenter's rights of those shareholders properly exercising dissenter's rights)
with respect to the shares of FSSB Common Stock formerly represented by those
Certificates except to surrender those Certificates in exchange for the Merger
Consideration as provided in this Agreement. No dividends or other distributions
declared after the Effective Time with respect to IBT Common Stock or interest
with respect to cash that is part of the Exchange Fund shall be paid to the
holder of any Certificate until the holder thereof shall surrender such
Certificate in accordance with this Section 3.2. After the surrender of a
Certificate in accordance with this Section 3.2, the record holder thereof shall
be entitled to receive any dividends or other distributions, without any
interest thereon, that become payable after the Effective Time with respect to
the shares of IBT Common Stock that are part of the Merger Consideration for the
shares of FSSB Common Stock represented by the surrendered Certificate.
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(d) Surrender by Persons Other than Record Holders. If the Person
surrendering a Certificate and signing the accompanying letter of transmittal is
not the record holder thereof, then it shall be a condition of the payment of
the Merger Consideration that: (i) such Certificate is properly endorsed to such
Person or is accompanied by appropriate stock powers, in either case signed
exactly as the name of the record holder appears on such Certificate, and is
otherwise in proper form for transfer, or is accompanied by appropriate evidence
of the authority of the Person surrendering such Certificate and signing the
letter of transmittal to do so on behalf of the record holder; and (ii) the
person requesting such exchange shall pay to the Exchange Agent in advance any
transfer or other taxes required by reason of the payment to a Person other than
the registered holder of the Certificate surrendered, or required for any other
reason, or shall establish to the satisfaction of the Exchange Agent that such
tax has been paid or is not payable.
(e) Closing of Transfer Books. From and after the Effective Time,
there shall be no transfers on the stock transfer books of FSSB of the FSSB
Common Stock that were outstanding immediately prior to the Effective Time. If,
after the Effective Time, Certificates representing such shares are presented
for transfer to the Exchange Agent, they shall be exchanged for the Merger
Consideration and canceled as provided in this Section 3.2. Certificates
surrendered for exchange by any person constituting an "Affiliate" of FSSB for
purposes of Rule 145 under the Securities Act shall not be exchanged until
Farmers has received a written agreement from such person as provided in Section
8.4.
(f) Return of Exchange Fund. At any time following the twelve (12)
month period after the Effective Time, IBT shall be entitled to require the
Exchange Agent to deliver to it any portions of the Exchange Fund which has been
made available to the Exchange Agent and not disbursed to holders of
Certificates (including, without limitation, all interest and other income
received by the Exchange Agent in respect of all funds made available to it),
and thereafter such holders shall be entitled to look to IBT (subject to
abandoned property, escheat and other similar laws) with respect to any Merger
Consideration that may be payable upon due surrender of the Certificates held by
them. Notwithstanding the foregoing, neither IBT nor the Exchange Agent shall be
liable to any holder of a Certificate for any Merger Consideration delivered in
respect of such Certificate to a public official pursuant to any abandoned
property, escheat or other similar law.
(g) Lost, Stolen or Destroyed Certificates. In the event any
Certificate shall have been lost, stolen or destroyed, upon the making of an
affidavit of that fact by the person claiming such Certificate to be lost,
stolen or destroyed and, if required by IBT, the posting by such person of a
bond in such amount as IBT may reasonably direct as indemnity against any claim
that may be made against it with respect to such Certificate, the Exchange Agent
will issue in exchange for such lost, stolen or destroyed Certificate, the
Merger Consideration deliverable in respect thereof.
(h) Withholding. IBT or the Exchange Agent will be entitled to deduct
and withhold from the consideration otherwise payable pursuant to this Agreement
or the transactions contemplated hereby to any holder of FSSB Common Stock such
amounts as IBT (or any Affiliate thereof) or the Exchange Agent are required to
deduct and withhold with respect
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to the making of such payment under the Code, or any applicable provision of
U.S. Federal, state, local or non-U.S. tax law. To the extent that such amounts
are properly withheld by IBT or the Exchange Agent, such withheld amounts will
be treated for all purposes of this Agreement as having been paid to the holder
of the FSSB Common Stock in respect of whom such deduction and withholding were
made and shall be delivered to the applicable taxing authorities.
3.3. Reservation of Shares. IBT shall reserve for issuance a sufficient
number of shares of IBT Common Stock for the purpose of issuing such shares to
FSSB shareholders in accordance with this Article III.
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF FSSB
4.1. Representations and Warranties of FSSB. FSSB represents and warrants
to Farmers that the statements contained in this Article IV are correct as of
the date of this Agreement, except as set forth in the FSSB Disclosure Schedule
delivered by FSSB to Farmers on the date hereof, and except as to any
representation or warranty which specifically relates to an earlier date. FSSB
has made a good faith effort to ensure that the disclosure on each schedule of
the FSSB Disclosure Schedule corresponds to the section referenced herein.
However, for purposes of the FSSB Disclosure Schedule, any item disclosed on any
schedule therein is deemed to be fully disclosed with respect to all schedules
under which such item may be relevant as and to the extent that it is reasonably
apparent that such item applies to such other schedule.
(a) Organization, Standing and Power.
(i) FSSB is a Michigan chartered commercial bank duly organized,
validly existing and in good standing under the laws of the State of Michigan.
FSSB has all requisite power and authority to own, lease and operate its
properties and to carry on its business as now being conducted. The deposits of
FSSB are insured by the FDIC to the fullest extent permitted by law, and all
premiums and assessments required to be paid in connection therewith have been
paid by FSSB when due.
(ii) FSSB Disclosure Schedule 4.1(a)(ii) sets forth each FSSB
Subsidiary. Each FSSB Subsidiary is a corporation, limited liability company or
other legal entity duly organized, validly existing and in good standing under
the laws of its jurisdiction of incorporation or organization.
(iii) The respective minute books of FSSB and each FSSB
Subsidiary accurately records, in all material respects, all material corporate
actions of the respective shareholders and boards of directors (including
committees) since January 1, 2003.
(iv) Prior to the date of this Agreement, FSSB has made available
to Farmers or a Farmers Entity, true and correct copies of the articles of
incorporation or charter and bylaws of FSSB and each FSSB Subsidiary. FSSB
Disclosure Schedule 4.1(a)(iv) sets forth any and all current noncompliance with
FSSB's charter and bylaws. Such noncompliance has not, and will not have, a
Material Adverse Effect on FSSB.
(b) Capital Structure.
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(i) The authorized capital stock of FSSB consists of 262,500
shares of FSSB Common Stock, of which 262,500 shares are outstanding, validly
issued, fully paid and nonassessable (except for assessments by the Bureau
pursuant to Section 3807 of the Michigan Banking Code of 1999) and free of
preemptive rights. There are no shares of FSSB Common Stock held by FSSB as
treasury stock. FSSB has no outstanding options, warrants or other rights which
are convertible into shares of FSSB Common Stock, except as disclosed on FSSB
Disclosure Schedule 4.1(b)(i). Neither FSSB nor any FSSB Subsidiary has or is
bound by any Rights of any character relating to the purchase, sale or issuance
or voting of, or right to receive dividends or other distributions on any shares
of FSSB Common Stock, or any other security of FSSB or any securities
representing the right to vote, purchase or otherwise receive any shares of FSSB
Common Stock or any other security of FSSB, other than shares issuable under the
FSSB Stock Benefit Plans. FSSB Disclosure Schedule 4.1(b)(i) sets forth: the
name of each holder of an award granted under any FSSB Stock Benefit Plan,
identifying the nature, number of shares, grant and vesting dates of the award.
(ii) Except for the FSSB Subsidiaries and as set forth in FSSB
Disclosure Schedule 4.1(b)(ii), FSSB does not possess, directly or indirectly,
any material equity interest in any corporate entity, except for equity
interests held in the investment portfolios of FSSB or any FSSB Subsidiary,
equity interests held by FSSB in a fiduciary capacity, and equity interests held
in connection with the lending activities of FSSB. FSSB owns each of its
outstanding shares of capital stock of each FSSB Subsidiary free and clear of
all liens, security interests, pledges, charges, encumbrances, agreements and
restrictions of any kind or nature.
(iii) To FSSB's Knowledge, except as set forth on FSSB Disclosure
Schedule 4.1(b)(iii), no Person is the beneficial owner (as defined in Section
13(d) of the Exchange Act) of 5% or more of the outstanding shares of FSSB
Common Stock.
(iv) No bonds, debentures, notes or other indebtedness having the
right to vote on any matters on which FSSB's shareholders may vote has been
issued by FSSB and are outstanding.
(c) Authority.
(i) FSSB has full corporate power and authority to execute and
deliver this Agreement and, subject to the receipt of the Regulatory Approvals
described in Section 8.3 and the approval of this Agreement by FSSB's
shareholders, to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement by FSSB and the completion by FSSB of the
transactions contemplated hereby, up to and including the Merger, have been duly
and validly approved by the Board of Directors of FSSB. This Agreement has been
duly and validly executed and delivered by FSSB, and subject to approval by the
shareholders of FSSB and receipt of the Regulatory Approvals, constitutes the
valid and binding obligation of FSSB, enforceable against FSSB in accordance
with its terms, subject to applicable bankruptcy, insolvency and similar laws
affecting creditors' rights generally, and subject, as to enforceability, to
general principles of equity.
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(ii) (A) The execution and delivery of this Agreement by FSSB,
(B) subject to receipt of Regulatory Approvals, and FSSB's and Farmers'
compliance with any conditions contained therein, and subject to the receipt of
the approval of the shareholders of FSSB, the consummation of the transactions
contemplated hereby, and (C) compliance by FSSB with any of the terms or
provisions hereof will not (i) conflict with or result in a breach of any
provision of the Articles of Incorporation or Bylaws of FSSB or any FSSB
Subsidiary; (ii) violate any statute, code, ordinance, rule, regulation,
judgment, order, writ, decree or injunction applicable to FSSB or any FSSB
Subsidiary or any of their respective properties or assets; or (iii) except as
set forth in FSSB Disclosure Schedule 4.1(c)(ii), violate, conflict with, result
in a breach of any provisions of, constitute a default (or an event which, with
notice or lapse of time, or both, would constitute a default), under, result in
the termination of, accelerate the performance required by, or result in a right
of termination or acceleration or the creation of any lien, security interest,
charge or other encumbrance upon any of the properties or assets of FSSB or any
FSSB Subsidiary under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, deed of trust, license, lease, agreement or other
investment or obligation to which FSSB or any FSSB Subsidiary is a party, or by
which they or any of their respective properties or assets may be bound or
affected, except for such violations, conflicts, breaches or defaults under
clause (ii) or (iii) hereof which, either individually or in the aggregate, will
not have a Material Adverse Effect on FSSB and the FSSB Subsidiaries taken as a
whole.
(d) Information Supplied. None of the information supplied or to be
supplied by FSSB or any FSSB Subsidiary for inclusion or incorporation by
reference in (i) the Registration Statement on Form S-4 to be filed with the SEC
by IBT in connection with the issuance of shares of IBT Common Stock in the
Merger (including the Proxy Statement and prospectus constituting a part
thereof, the "S-4") will, at the time the S-4 becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading, and (ii) the Proxy Statement - Prospectus and
any amendment or supplement thereto will, at the date of mailing to FSSB
shareholders and at the time of the meeting of shareholders of FSSB to be held
in connection with the Merger, contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading. The Proxy Statement -
Prospectus (except for such portions thereof that relate only to IBT) will
comply in all material respects with the provisions of the Exchange Act and the
rules and regulations thereunder, and the S-4 (except for such portions thereof
that relate only to IBT) will comply in all material respects with the
provisions of the Securities Act and the rules and regulations thereunder.
(e) Consents. Except for the Regulatory Approvals referred to in
Section 8.3 hereof and consents set forth in FSSB Disclosure Schedule 4.1(e) and
compliance with any conditions contained therein, and the approval of this
Agreement by the requisite vote of the shareholders of FSSB, no consents,
waivers or approvals of, or filings or registrations with, any Governmental
Entity or Bank Regulator are necessary, and, to FSSB's Knowledge, no consents,
waivers or approvals of, or filings or registrations with, any other third
parties are necessary, in connection with the execution and delivery of this
Agreement by FSSB, and the completion by FSSB of the Merger. To FSSB's
knowledge, (i) it has not received notice as of the date hereof that any Bank
Regulator intends to disapprove or object to the completion of the transactions
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contemplated by this Agreement, and (ii) there is no reason to expect that all
Regulatory Approvals required for the consummation of the transactions
contemplated by this Agreement will not be received.
(f) Financial Statements.
(i) FSSB has previously made available to Farmers or a Farmers
Entity the FSSB Financial Statements. Except as disclosed in FSSB Disclosure
Schedule 4.1(f)(i), the FSSB Financial Statements have been prepared in
accordance with GAAP, and (including the related notes where applicable) fairly
present in each case in all material respects (subject to the case of the
unaudited interim statements to normal year-end adjustments) the consolidated
financial position, results of operations and cash flows of FSSB and the FSSB
Subsidiaries on a consolidated basis as of and for the respective periods ending
on the dates thereof, in accordance with GAAP during the periods involved,
except as indicated in the notes thereto.
(ii) Except as disclosed in FSSB Disclosure Schedule 4.1(f)(ii),
at the date of each balance sheet included in the FSSB Financial Statements,
FSSB did not have any liability, obligation or loss contingency of any nature
(whether absolute, accrued, contingent or otherwise) of a type required to be
reflected in such FSSB Financial Statements or in the footnotes thereto which
were not fully reflected or reserved against therein or fully disclosed in a
footnote thereto, except for liabilities, obligations and loss contingencies
which were not material individually or in the aggregate or which are incurred
in the ordinary course of business, consistent with past practice, and except
for liabilities, obligations and loss contingencies which are within the subject
matter of a specific representation and warranty herein and subject, in the case
of any unaudited statements, to normal, recurring audit adjustments and the
absence of footnotes.
(g) Taxes. Except as set forth in FSSB Disclosure Schedule 4.1(g),
FSSB and the FSSB Subsidiaries that are at least 80% owned by FSSB are members
of the same Affiliated group within the meaning of Code Section 1504(a) and (A)
FSSB has duly filed all federal, state and material local tax returns required
to be filed by or with respect to FSSB and each Significant Subsidiary of FSSB
on or prior to the Closing Date, taking into account any extensions (all such
returns, to FSSB's Knowledge, being accurate and correct in all material
respects) and has duly paid or made provisions for the payment of all material
federal, state and local taxes which have been incurred by or are due or claimed
to be due from FSSB and any Significant Subsidiary of FSSB by any taxing
authority or pursuant to any written tax sharing agreement on or prior to the
Closing Date other than taxes or other charges which (i) are not delinquent,
(ii) are being contested in good faith, or (iii) have not yet been fully
determined, (B) as of the date of this Agreement, FSSB has received no written
notice of, and to FSSB's Knowledge there is no audit examination, deficiency
assessment, tax investigation or refund litigation with respect to any taxes of
FSSB or any of its Significant Subsidiaries, and no claim has been made by any
authority in a jurisdiction where FSSB or any of its Significant Subsidiaries do
not file tax returns that FSSB or any such Significant Subsidiary is subject to
taxation in that jurisdiction and (C) FSSB and its Significant Subsidiaries have
not executed an extension or waiver of any statute of limitations on the
assessment or collection of any material tax due that is currently in effect.
FSSB and each of its Significant Subsidiaries has withheld and
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paid all taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, independent contractor, creditor,
shareholder or other third party, and FSSB and each of its Significant
Subsidiaries, to FSSB's Knowledge, has timely complied with all applicable
information reporting requirements under Part III, Subchapter A of Chapter 61 of
the Code and similar applicable state and local information reporting
requirements.
(h) No Material Adverse Effect. Except as disclosed in FSSB Disclosure
Schedule 4.1(h), FSSB and the FSSB Subsidiaries, taken as a whole, have not
suffered any Material Adverse Effect since December 31, 2004, and, to FSSB's
Knowledge, no event has occurred or circumstance arisen since that date which,
in the aggregate, has had or is reasonably likely to have a Material Adverse
Effect on FSSB and the FSSB Subsidiaries, taken as a whole.
(i) Material Contracts; Leases; Defaults.
(i) Except as set forth in FSSB Disclosure Schedule 4.1(i)(i),
neither FSSB nor any FSSB Subsidiary is a party to or subject to: (i) any
employment, consulting or severance contract with any past or present officer,
director or employee of FSSB or any FSSB Subsidiary, except for "at will"
arrangements; (ii) any plan or contract providing for bonuses, pensions,
options, deferred compensation, retirement payments, profit sharing or similar
material arrangements for or with any past or present officers, directors or
employees of FSSB or any FSSB Subsidiary; (iii) any collective bargaining
agreement with any labor union relating to employees of FSSB or any FSSB
Subsidiary; (iv) any agreement (other than this Agreement) which by its terms
limits the payment of dividends by FSSB or any FSSB Subsidiary; (v) any
instrument evidencing or related to material indebtedness for borrowed money
whether directly or indirectly, by way of purchase money obligation, conditional
sale, lease purchase, guaranty or otherwise, in respect of which FSSB or any
FSSB Subsidiary is an obligor to any person, which instrument evidences or
relates to indebtedness other than deposits, repurchase agreements, bankers'
acceptances, and "treasury tax and loan" accounts established in the ordinary
course of business and transactions in "federal funds" or which contains
financial covenants or other restrictions (other than those relating to the
payment of principal and interest when due) which would be applicable on or
after the Closing Date to Farmers or any Farmers Entity; (vi) any other
agreement, written or oral, that obligates FSSB or any FSSB Subsidiary for the
payment of more than $50,000 annually; or (vii) any agreement (other than this
Agreement), contract, arrangement, commitment or understanding (whether written
or oral) that restricts or limits in any material way the conduct of business by
FSSB or any FSSB Subsidiary (it being understood that any non-compete or similar
provision shall be deemed material).
(ii) Each real estate lease that will require the consent of the
lessor or its agent or the assignment to Surviving Corporation as a result of
the Merger by virtue of the terms of any such lease, is listed in FSSB
Disclosure Schedule 4.1(i)(ii) identifying the section of the lease that
contains such prohibition or restriction. Subject to any consents that may be
required as a result of the transactions contemplated by this Agreement, to its
Knowledge, neither FSSB nor any FSSB Subsidiary is in default in any material
respect under any material contract, agreement, commitment, arrangement, lease,
insurance policy or other instrument to which it is a party, by which its
assets, business, or operations may be bound or affected, or under which it or
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its assets, business, or operations receive benefits, and there has not occurred
any event that, with the lapse of time or the giving of notice or both, would
constitute such a default.
(iii) True and correct copies of agreements, contracts,
arrangements and instruments referred to in Section 4.1(i)(i) and 4.1(i)(ii)
have been made available to Farmers or its Affiliates on or before the date
hereof, are listed on FSSB Disclosure Schedule 4.1(i)(i) and 4.1(i)(ii) and are
in full force and effect on the date hereof. Except as set forth in FSSB
Disclosure Schedule 4.1(i)(iii), no plan, contract, employment agreement,
termination agreement, or similar agreement or arrangement to which FSSB or any
FSSB Subsidiary is a party or under which FSSB or any FSSB Subsidiary may be
liable contains provisions which permit an employee or independent contractor to
terminate it without cause and continue to accrue future benefits thereunder.
Except as set forth in FSSB Disclosure Schedule 4.1(i)(iii), no such agreement,
plan, contract, or arrangement (x) provides for acceleration in the vesting of
benefits or payments due thereunder upon the occurrence of a change in ownership
or control of FSSB or any FSSB Subsidiary; or (y) requires FSSB or any FSSB
Subsidiary to provide a benefit in the form of FSSB Common Stock or determined
by reference to the value of FSSB Common Stock. FSSB Disclosure Schedule
4.1(i)(iii) sets forth an analysis of FSSB Pension Plan liability including the
amounts that are funded and unfunded.
(j) Ownership of Property; Insurance Coverage.
(i) FSSB and each FSSB Subsidiary has good and, as to real
property, marketable title to all material assets and properties owned by FSSB
or each FSSB Subsidiary in the conduct of its businesses, whether such assets
and properties are real or personal, tangible or intangible, including assets
and property reflected in the balance sheet contained in the most recent FSSB
Financial Statements or acquired subsequent thereto (except to the extent that
such assets and properties have been disposed of in the ordinary course of
business, since the date of such balance sheet), subject to no material
encumbrances, liens, mortgages, security interests or pledges, except (i) those
items which secure liabilities for public or statutory obligations or any
discount with, borrowing from or other obligations to FHLB, inter-bank credit
facilities or any transaction by FSSB acting in a fiduciary capacity, and (ii)
statutory liens for amounts not yet delinquent or which are being contested in
good faith. FSSB and the FSSB Subsidiaries, as lessee, have the right under
valid and existing leases of real and personal properties used by FSSB and the
FSSB Subsidiaries in the conduct of their businesses to occupy or use all such
properties as presently occupied and used by each of them. Such existing leases
and commitments to lease constitute or will constitute operating leases for both
tax and financial accounting purposes and the lease expense and minimum rental
commitments with respect to such leases and lease commitments are as disclosed
in all material respects in the notes to the FSSB Financial Statements.
(ii) FSSB and each Significant Subsidiary of FSSB currently
maintain insurance considered by each of them to be reasonable for their
respective operations. Neither FSSB nor any Significant Subsidiary of FSSB has
received notice from any insurance carrier that (i) such insurance will be
canceled or that coverage thereunder will be reduced or eliminated, or (ii)
premium costs with respect to such policies of insurance will be substantially
increased. There are presently no material claims pending under such policies of
insurance and no notices
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of material claims have been given by FSSB or any Significant Subsidiary of FSSB
under such policies. All such insurance is valid and enforceable and in full
force and effect, and within the last three (3) years FSSB and each Significant
Subsidiary of FSSB has received each type of insurance coverage for which it has
applied and during such periods has not been denied indemnification for any
material claims submitted under any of its insurance policies. FSSB Disclosure
Schedule 4.1(j) (ii) identifies all policies of insurance maintained by FSSB and
each Significant Subsidiary of FSSB.
(k) Legal Proceedings. Except as set forth in FSSB Disclosure Schedule
4.1(k), neither FSSB nor any FSSB Subsidiary is a party to any, and there are no
pending or, to FSSB's Knowledge, threatened legal, administrative, arbitration
or other proceedings, claims (whether asserted or unasserted), actions or
governmental investigations or inquiries of any nature (i) against FSSB or any
FSSB Subsidiary, (ii) to which FSSB or any FSSB Subsidiary's assets are or may
be subject, (iii) challenging the validity or propriety of any of the
transactions contemplated by this Agreement, or (iv) which could adversely
affect the ability of FSSB to perform under this Agreement, except for any
proceeding, claim, action, investigation or inquiry referred to in clauses (i)
and (ii) which, individually or in the aggregate, would not be reasonably
expected to have a Material Adverse Effect.
(l) Compliance With Applicable Law.
(i) Except as set forth in FSSB Disclosure Schedule 4.1(l)(i), to
FSSB's Knowledge, each of FSSB and each FSSB Subsidiary is in compliance in all
material respects with all applicable federal, state, and local statutes, laws,
regulations, ordinances, rules, judgments, orders or decrees applicable to it,
its properties, assets and deposits, its business, and its conduct of business
and its relationship with its employees, including, without limitation, the USA
PATRIOT Act, the Bank Secrecy Act, the Equal Credit Opportunity Act, the Fair
Housing Act, the Community Reinvestment Act of 1977 ("CRA"), the Home Mortgage
Disclosure Act, and all other applicable fair lending laws and other laws
relating to discriminatory business practices and neither FSSB nor any FSSB
Subsidiary has received any written notice to the contrary.
(ii) Each of FSSB and each FSSB Subsidiary has all material
permits, licenses, authorizations orders and approvals of, and has made all
filings, applications and registrations with, all Bank Regulators that are
required in order to permit it to own or lease its properties and to conduct its
business as presently conducted; all such permits, licenses, certificates of
authority, orders and approvals are in full force and effect and, to the
Knowledge of FSSB, no suspension or cancellation of any such permit, license,
certificate, order or approval is threatened or will result from the
consummation of the transactions contemplated by this Agreement, subject to
obtaining the approvals set forth in Section 8.3.
(iii) Except as set forth in FSSB Disclosure Schedule 4.1(l)(iii)
for the period beginning January 1, 2003, neither FSSB nor any FSSB Subsidiary
has received any written notification or, to FSSB's Knowledge, any other
communication from any Bank Regulator (i) asserting that FSSB or any FSSB
Subsidiary is not in material compliance with any of the statutes, regulations
or ordinances which such Bank Regulator enforces; (ii) threatening to
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revoke any license, franchise, permit or governmental authorization which is
material to FSSB or any FSSB Subsidiary; (iii) requiring or threatening to
require FSSB or any FSSB Subsidiary, or indicating that FSSB or any FSSB
Subsidiary may be required, to enter into a cease and desist order, agreement or
memorandum of understanding or any other agreement with any federal or state
governmental agency or authority which is charged with the supervision or
regulation of banks or engages in the insurance of bank deposits restricting or
limiting, or purporting to restrict or limit, in any material respect the
operations of FSSB or any FSSB Subsidiary, including without limitation any
restriction on the payment of dividends; or (iv) directing, restricting or
limiting, or purporting to direct, restrict or limit, in any material manner the
operations of FSSB or any FSSB Subsidiary (any such notice, communication,
memorandum, agreement or order described in this sentence is hereinafter
referred to as a "Regulatory Agreement"). Except as set forth in FSSB Disclosure
Schedule 4.1(l)(iii), neither FSSB nor any FSSB Subsidiary has consented to or
entered into any Regulatory Agreement that is currently in effect. Any such
Regulatory Agreement and all correspondence relating thereto is set forth in
FSSB Disclosure Schedule 4.1(l)(iii). The most recent regulatory rating given to
FSSB as to compliance with the CRA is "Satisfactory" or better.
(m) Employee Benefit Plans.
(i) FSSB Disclosure Schedule 4.1(m)(i) includes a descriptive
list of all existing bonus, incentive, deferred compensation, pension,
retirement, profit-sharing, thrift, savings, employee stock ownership, stock
bonus, stock purchase, restricted stock, stock option, stock appreciation,
phantom stock, severance, welfare benefit plans, fringe benefit plans,
employment, severance and change in control agreements and all other material
benefit practices, policies and arrangements maintained by FSSB or any FSSB
Subsidiary in which any employee or former employee, consultant or former
consultant or director or former director of FSSB or any FSSB Subsidiary
participates or to which any such employee, consultant or director is a party or
is otherwise entitled to receive benefits (the "Compensation and Benefit
Plans"). Except as set forth in FSSB Disclosure Schedule 4.1(m)(i), neither FSSB
nor any of its Subsidiaries has any commitment to create any additional
Compensation and Benefit Plan or to materially modify, change or renew any
existing Compensation and Benefit Plan (any modification or change that
increases the cost of such plans would be deemed material), except as required
to maintain the qualified status thereof. FSSB has made available to Farmers or
a Farmers Entity true and correct copies of the Compensation and Benefit Plans.
There are no outstanding unvested or unexercised awards under any FSSB benefit
plans and there are no awards available for issuance under any such plan.
(ii) Except as disclosed in FSSB Disclosure Schedule 4.1(m)(ii),
each Compensation and Benefit Plan has been operated and administered in all
material respects in accordance with its terms and with applicable law,
including, but not limited to, ERISA, the Code, the Securities Act, the Exchange
Act, the Age Discrimination in Employment Act, COBRA, the Health Insurance
Portability and Accountability Act and any regulations or rules promulgated
thereunder, and all material filings, disclosures and notices required by ERISA,
the Code, the Securities Act, the Exchange Act, the Age Discrimination in
Employment Act and any other applicable law have been timely made or any
interest, fines, penalties or other impositions for late filings have been paid
in full. Each Compensation and Benefit Plan which is an
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"employee pension benefit plan" within the meaning of Section 3(2) of ERISA (a
"Pension Plan") and which is intended to be qualified under Section 401(a) of
the Code has received a favorable determination letter from the IRS, and FSSB is
not aware of any circumstances which are reasonably likely to result in
revocation of any such favorable determination letter. There is no material
pending or, to the Knowledge of FSSB, threatened action, suit or claim relating
to any of the Compensation and Benefit Plans (other than routine claims for
benefits). Neither FSSB nor any FSSB Subsidiary has engaged in a transaction, or
omitted to take any action, with respect to any Compensation and Benefit Plan
that would reasonably be expected to subject FSSB or any FSSB Subsidiary to an
unpaid tax or penalty imposed by either Section 4975 of the Code or Section 502
of ERISA.
(iii) Except as set forth in FSSB Disclosure Schedule
4.1(m)(iii), no liability, other than PBGC premiums arising in the ordinary
course of business, has been or is expected by FSSB or any of its Subsidiaries
to be incurred with respect to any FSSB Compensation and Benefit Plan which is a
defined benefit plan subject to Title IV of ERISA ("FSSB Defined Benefit Plan"),
or with respect to any "single-employer plan" (as defined in Section 4001(a) of
ERISA) currently or formerly maintained by FSSB or any entity which is
considered one employer with FSSB under Section 4001(b)(1) of ERISA or Section
414 of the Code (an "ERISA Affiliate") (such plan hereinafter referred to as an
"ERISA Affiliate Plan"). To the Knowledge of FSSB and any FSSB Subsidiary,
except as set forth in FSSB Disclosure Schedule 4.1(m)(iii), no FSSB Defined
Benefit Plan had an "accumulated funding deficiency" (as defined in Section 302
of ERISA), whether or not waived, as of the last day of the end of the most
recent plan year ending prior to the date hereof. Except as set forth in FSSB
Disclosure Schedule 4.1(m)(iii), the fair market value of the assets of each
FSSB Defined Benefit Plan exceeds the present value of the benefits guaranteed
under Section 4022 of ERISA under such FSSB Defined Benefit Plan as of the end
of the most recent plan year with respect to the respective FSSB Defined Benefit
Plan ending prior to the date hereof, calculated on the basis of the actuarial
assumptions used in the most recent actuarial valuation for such FSSB Defined
Benefit Plan as of the date hereof; and no notice of a "reportable event" (as
defined in Section 4043 of ERISA) for which the 30-day reporting requirement has
not been waived has been required to be filed for any FSSB Defined Benefit Plan
within the 12-month period ending on the date hereof. Except as set forth in
FSSB Disclosure Schedule 4.1(m)(iii), neither FSSB nor any of its Subsidiaries
has provided, or is required to provide, security to any FSSB Defined Benefit
Plan or to any single-employer plan of an ERISA Affiliate pursuant to Section
401(a)(29) of the Code or has taken any action, or omitted to take any action,
that has resulted, or would reasonably be expected to result in the imposition
of a lien under Section 412(n) of the Code or pursuant to ERISA. To the
Knowledge of FSSB, and except as set forth in FSSB Disclosure Schedule
4.1(m)(iii), there is no pending investigation or enforcement action by any Bank
Regulator with respect to any Compensation and Benefit Plan or any ERISA
Affiliate Plan.
(iv) With respect to any FSSB Defined Benefit Plan that is a
"multi-employer plan" as such term is defined in Section 3(37) of ERISA,
covering employees of FSSB or any ERISA Affiliate, (i) neither FSSB nor any
ERISA Affiliate has made or suffered a "complete withdrawal" or "partial
withdrawal," as such terms are respectively defined in Sections 4203 and 4205 of
ERISA, (ii) no event has occurred, and no circumstances exist, that alone or
with the passage of time present a material risk of a complete or partial
withdrawal, and
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(iii) neither FSSB or any ERISA Affiliate has any contingent liability under
Section 4204 of ERISA and no circumstances exist that present a material risk
that any such plan will go into reorganization. FSSB Disclosure Schedule
4.1(m)(iv) lists FSSB's best estimate of the amount of withdrawal liability that
would be incurred if FSSB and each ERISA Affiliate were to make a complete
withdrawal from such plan as of the Effective Time and also states the aggregate
withdrawal liability of FSSB and the ERISA Affiliate. There are no "unfunded
vested benefits" (within the meaning of Section 4211 of ERISA) as of the end of
the most recently completed plan year and as of the date of this Agreement.
(v) All material contributions required to be made under the terms of
any Compensation and Benefit Plan or ERISA Affiliate Plan or any employee
benefit arrangements to which FSSB or any FSSB Subsidiary is a party or a
sponsor have been timely made, and all anticipated contributions and funding
obligations are accrued on FSSB's consolidated financial statements to the
extent required by GAAP. FSSB or its Subsidiaries have expensed and accrued as a
liability the present value of future benefits under each applicable
Compensation and Benefit Plan for financial reporting purposes as required by
GAAP.
(vi) Neither FSSB nor any FSSB Subsidiary has any obligations to
provide retiree health, life insurance, disability insurance, or other retiree
death benefits under any Compensation and Benefit Plan, other than benefits
mandated by Section 4980B of the Code. Except as set forth in FSSB Disclosure
Schedule 4.1(m)(vi), there has been no communication to employees by FSSB or any
FSSB Subsidiary that would reasonably be expected to promise or guarantee such
employees retiree health, life insurance, disability insurance, or other retiree
death benefits.
(vii) Except as set forth in FSSB Disclosure Schedule 4.1(m)(vii),
FSSB and its Subsidiaries do not maintain any Compensation and Benefit Plans
covering employees who are not United States residents.
(viii) Except as set forth in FSSB Disclosure Schedule 4.1(m)(viii),
with respect to each Compensation and Benefit Plan, if applicable, FSSB has
provided or made available to Farmers or a Farmers Entity copies of the: (A)
trust instruments and insurance contracts, (B) two (2) most recent Forms 5500
filed with the IRS, (C) two (2) most recent actuarial reports and financial
statements; (D) most recent summary plan description, (E) most recent
determination letter issued by the IRS; (F) any Form 5310 or Form 5330 filed
with the IRS within the last two years, and (G) most recent nondiscrimination
tests performed under ERISA and the Code (including 401(k) and 401(m) tests), if
applicable.
(ix) Except as set forth in FSSB Disclosure Schedule 4.1(m)(ix), the
consummation of the Merger will not, directly or indirectly (including, without
limitation, as a result of any termination of employment or service at any time
prior to or following the Effective Time) (A) entitle any employee, consultant
or director to any payment or benefit (including severance pay, change in
control benefit, or similar compensation) or any increase in compensation, (B)
result in the vesting or acceleration of any benefits under any Compensation and
Benefit Plan or (C) result in any material increase in benefits payable under
any Compensation and Benefit Plan.
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(x) Neither FSSB nor any FSSB Subsidiary maintains any
compensation plans, programs or arrangements under which any payment is
reasonably likely to become non-deductible, in whole or in part, for tax
reporting purposes as a result of the limitations under Section 162(m) of the
Code and the regulations issued thereunder.
(xi) To the Knowledge of FSSB, the consummation of the Merger
will not, directly or indirectly (including without limitation, as a result of
any termination of employment or service at any time prior to or following the
Effective Time), entitle any current or former employee, director or independent
contractor of FSSB or any FSSB Subsidiary to any actual or deemed payment (or
benefit) which could constitute a "parachute payment" (as such term is defined
in Section 280G of the Code).
(xii) There are no stock appreciation or similar rights, earned
dividends or dividend equivalents, or shares of restricted stock, outstanding
under any of the Compensation and Benefit Plans or otherwise as of the date
hereof and none will be granted, awarded, or credited after the date hereof.
(n) Brokers, Finders and Financial Advisors. Except as set forth in
FSSB Disclosure Schedule 4.1(n), neither FSSB nor any FSSB Subsidiary, nor any
of their respective officers, directors, employees or agents, has employed any
broker, finder or financial advisor other than Austin Associates, LLC in
connection with the transactions contemplated by this Agreement, or incurred any
liability or commitment for any fees or commissions to any such person other
than Austin Associates, LLC in connection with the transactions contemplated by
this Agreement.
(o) Environmental Matters.
(i) Except as may be set forth in FSSB Disclosure Schedule 4.1(o)
and any Phase I Environmental Report identified therein, with respect to FSSB
and each FSSB Subsidiary:
(A) Each of FSSB and the FSSB Subsidiaries and, to FSSB's
Knowledge, the Participation Facilities and Loan Properties are, and have been,
in substantial compliance with, and are not liable under, any Environmental
Laws;
(B) FSSB has received no written notice that there is any
suit, claim, action, demand, executive or administrative order, directive,
investigation or proceeding pending and, to FSSB's Knowledge, no such action is
threatened, before any court, governmental agency or other forum against it or
any of the FSSB Subsidiaries or any Participation Facility (x) for alleged
noncompliance (including by any predecessor) with, or liability under, any
Environmental Law or (y) relating to the presence of or release into the
environment of any Materials of Environmental Concern, whether or not occurring
at or on a site owned, leased or operated by it or any of the FSSB Subsidiaries
or any Participation Facility;
(C) FSSB has received no notice that there is any suit,
claim, action, demand, executive or administrative order, directive,
investigation or proceeding pending and, to FSSB's Knowledge no such action is
threatened, before any court, governmental agency
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or other forum relating to or against any Loan Property (or FSSB or any of the
FSSB Subsidiaries in respect of such Loan Property) (x) relating to alleged
noncompliance (including by any predecessor) with, or liability under, any
Environmental Law or (y) relating to the presence of or release into the
environment of any Materials of Environmental Concern, whether or not occurring
at or on a site owned, leased or operated by a Loan Property;
(D) To FSSB's Knowledge, the properties currently owned or
operated by FSSB or any FSSB Subsidiary (including, without limitation, soil,
groundwater or surface water on, or under the properties, and buildings thereon)
are not contaminated with and do not otherwise contain any Materials of
Environmental Concern other than as permitted under applicable Environmental
Law;
(E) neither FSSB nor any FSSB Subsidiary has received any
written notice, demand letter, executive or administrative order, directive or
request for information from any federal, state, local or foreign governmental
entity or any third party indicating that it may be in violation of, or liable
under, any Environmental Law;
(F) To FSSB's Knowledge, there are no underground storage
tanks on, in or under any properties owned or operated by FSSB or any of the
FSSB Subsidiaries or any Participation Facility, and to FSSB's Knowledge, no
underground storage tanks have been closed or removed from any properties owned
or operated by FSSB or any of the FSSB Subsidiaries or any Participation
Facility; and
(G) To FSSB's Knowledge, during the period of (s) FSSB's or
any of the FSSB Subsidiaries' ownership or operation of any of their respective
current properties or (t) FSSB's or any of the FSSB Subsidiaries' participation
in the management of any Participation Facility, there has been no contamination
by or release of Materials of Environmental Concerns in, on, under or affecting
such properties that could reasonably be expected to result in material
liability under the Environmental Laws. To FSSB's Knowledge, prior to the period
of (x) FSSB's or any of the FSSB Subsidiaries' ownership or operation of any of
their respective current properties or (y) FSSB's or any of the FSSB
Subsidiaries' participation in the management of any Participation Facility,
there was no contamination by or release of Materials of Environmental Concern
in, on, under or affecting such properties that could reasonably be expected to
result in material liability under the Environmental Laws.
(ii) "Loan Property" means any property in which the applicable
party (or a Subsidiary of it) holds a security interest, and, where required by
the context, includes the owner or operator of such property, but only with
respect to such property. "Participation Facility" means any facility in which
the applicable party (or a Subsidiary of it) participates in the management
(including all property held as trustee or in any other fiduciary capacity) and,
where required by the context, includes the owner or operator of such property,
but only with respect to such property.
(p) Loan Portfolio.
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(i) To FSSB's Knowledge, the allowance for loan losses reflected
in the notes to FSSB's audited consolidated statement of financial condition at
December 31, 2004 was, and the allowance for loan losses shown in the notes to
the FSSB's unaudited consolidated financial statements for periods ending after
December 31, 2004 were, or will be, adequate, as of the dates thereof, under
GAAP.
(ii) FSSB Disclosure Schedule 4.1(p)(ii) sets forth a listing, as
of the most recently available date, by account, of: (A) each borrower, customer
or other party which has notified FSSB or any FSSB Subsidiary during the past
twelve months of, or has asserted against FSSB or any FSSB Subsidiary, in each
case in writing, any "lender liability" or similar claim, and, to the Knowledge
of FSSB, each borrower, customer or other party which has given FSSB or any FSSB
Subsidiary any oral notification of, or orally asserted to or against FSSB or
any FSSB Subsidiary, any such claim; and (B) all loans, (1) that are
contractually past due 90 days or more in the payment of principal and/or
interest, (2) that are on non-accrual status, (3) that as of the date of this
Agreement are classified as "Other Loans Specifically Mentioned", "Special
Mention", "Substandard", "Doubtful", "Loss", "Classified", "Criticized", "Watch
list" or words of similar import, together with the principal amount of and
accrued and unpaid interest on each such loan and the identity of the obligor
thereunder, (4) where the interest rate terms have been reduced and/or the
maturity dates have been extended subsequent to the agreement under which the
loan was originally created due to concerns regarding the borrower's ability to
pay in accordance with such initial terms, or (5) where a specific reserve
allocation exists in connection therewith; and (C) all other assets classified
by FSSB or any FSSB Subsidiary as real estate acquired through foreclosure or in
lieu of foreclosure, including in-substance foreclosures, and all other assets
currently held that were acquired through foreclosure or in lieu of foreclosure.
(iii) All loans receivable (including discounts) and accrued
interest entered on the books of FSSB and the FSSB Subsidiaries arose out of
bona fide arm's-length transactions, were made for good and valuable
consideration in the ordinary course of FSSB's or the appropriate FSSB
Subsidiary's respective business, and the notes or other evidences of
indebtedness with respect to such loans (including discounts) are true and
genuine and are what they purport to be, except as set forth in FSSB Disclosure
Schedule 4.1(p)(iii). To the Knowledge of FSSB, the loans, discounts and the
accrued interest reflected on the books of FSSB and the FSSB Subsidiaries are
subject to no defenses, set-offs or counterclaims (including, without
limitation, those afforded by usury or truth-in-lending laws), except as may be
provided by bankruptcy, insolvency or similar laws affecting creditors' rights
generally or by general principles of equity. Except as set forth in FSSB
Disclosure Schedule 4.1(p)(iii), all such loans are owned by FSSB or the
appropriate FSSB Subsidiary free and clear of any liens.
(iv) The notes and other evidences of indebtedness evidencing the
loans described above, and all pledges, mortgages, deeds of trust and other
collateral documents or security instruments relating thereto are, in all
material respects, valid, true and genuine, and what they purport to be.
(q) Related Party Transactions. Except as set forth in FSSB Disclosure
Schedule 4.1(q), neither FSSB nor any FSSB Subsidiary is a party to any
transaction (including
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any loan or other credit accommodation) with any Affiliate of FSSB or any FSSB
Subsidiary. All such transactions (a) were made in the ordinary course of
business, (b) were made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with other Persons, and (c) did not involve more than the normal
risk of collectibility or present other unfavorable features. No loan or credit
accommodation to any Affiliate of FSSB or any FSSB Subsidiary is presently in
default or, during the three (3) year period prior to the date of this
Agreement, has been in default or has been restructured, modified or extended
except for rate or other modifications pursuant to FSSB's loan modification
policy that is applicable to all Persons. Neither FSSB nor any FSSB Subsidiary
has been notified that principal and interest with respect to any such loan or
other accommodation will not be paid when due or that the loan grade
classification accorded such loan or credit accommodation by FSSB is
inappropriate.
(r) Deposits. Except as disclosed in FSSB Disclosure Schedule 4.1(f),
none of the deposits of FSSB is a "brokered deposit" as defined in 12 C.F.R.
Section 337.6(a)(2).
(s) Required Vote. The affirmative vote of not less than 2/3rds of the
issued and outstanding shares of FSSB Common Stock is required to approve this
Agreement and the Merger under FSSB's Articles of Incorporation and Michigan
law.
(t) Intellectual Property. FSSB and each Significant Subsidiary of
FSSB owns or, to FSSB's Knowledge, possesses valid and binding licenses and
other rights to use all patents, copyrights, trade secrets, trade names,
servicemarks and trademarks used in their business, each without payment, and
neither FSSB nor any Significant Subsidiary of FSSB has received any notice of
conflict with respect thereto that asserts the rights of others. FSSB and each
Significant Subsidiary of FSSB have performed all the obligations required to be
performed, and are not in default in any respect, under any contract, agreement,
arrangement or commitment relating to any of the foregoing.
(u) Administration of Trust Accounts. FSSB and each FSSB Subsidiary
has properly administered in all material respects and which could reasonably be
excepted to be material to the financial condition of FSSB and the FSSB
Subsidiaries taken as a whole, all accounts for which it acts as a fiduciary,
including but not limited to accounts for which it serves as a trustee, agent,
custodian, personal representative, guardian, conservator or investment advisor,
in accordance with the terms of the governing documents and applicable state and
federal law and regulations and common law. To the Knowledge of FSSB, neither
FSSB, any FSSB Subsidiary, nor any director, officer or employee of FSSB or any
FSSB Subsidiary has committed any breach of trust with respect to any such
fiduciary account which is material to or could reasonably be expected to be
material to the financial condition of FSSB and the FSSB Subsidiaries taken as a
whole, and the accountings for each such fiduciary account are true and correct
in all material respects and accurately reflect the assets of such fiduciary
account.
ARTICLE V - REPRESENTATIONS AND WARRANTIES OF FARMERS
5.1. Representations and Warranties of Farmers. Farmers and IBT represent
and warrant to FSSB that the statements contained in this Article V are correct
as of the date of this
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Agreement, except as set forth in the Farmers Entity Disclosure Schedule
delivered by Farmers and IBT to FSSB on the date hereof. Farmers and IBT have
made a good faith effort to ensure that the disclosure on each schedule of the
Farmers Entity Disclosure Schedule corresponds to the section referenced herein.
However, for purposes of the Farmers Entity Disclosure Schedule, any item
disclosed on any schedule therein is deemed to be fully disclosed with respect
to all schedules under which such item may be relevant as and to the extent that
it is reasonably apparent that such item applies to such other schedule.
(a) Organization, Standing and Power.
(i) IBT is a corporation duly organized, validly existing and in
good standing under the laws of the State of Michigan, and is duly registered as
a financial services holding company under the Bank Holding Company Act of 1956,
as amended. IBT has all requisite power and authority to own, lease and operate
its properties and to carry on its business as now conducted and is duly
licensed or qualified to do business in the states of the United States and
foreign jurisdictions where its ownership or leasing of property or the conduct
of its business requires such qualification.
(ii) Isabella Bank and Trust is a state chartered bank duly
organized, validly existing and in good standing under the laws of the State of
Michigan. The deposits of Isabella Bank and Trust are insured by the FDIC to the
fullest extent permitted by law, and all premiums and assessments required to be
paid in connection therewith have been paid when due.
(iii) Farmers is a state chartered bank duly organized, validly
existing and in good standing under the laws of the State of Michigan. The
deposits of Farmers are insured by the FDIC to the fullest extent permitted by
law, and all premiums and assessments required to be paid in connection
therewith have been paid when due.
(iv) Farmers Entity Disclosure Schedule 5.1(a)(iv) sets forth
each IBT Subsidiary. Each IBT Subsidiary (other than Isabella Bank and Trust and
Farmers) is a corporation or limited liability company duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation or organization.
(b) Capital Structure.
(i) The authorized capital stock of IBT consists of 10,000,000
shares of IBT Common Stock, of which 4,949,515 shares are outstanding, validly
issued, fully paid and nonassessable and free of preemptive rights. Neither IBT
nor any IBT Entity has or is bound by any Rights of any character relating to
the purchase, sale or issuance or voting of, or right to receive dividends or
other distributions on any shares of IBT Common Stock, or any other security of
IBT or any securities representing the right to vote, purchase or otherwise
receive any shares of IBT Common Stock or any other security of IBT, other than
shares issuable under the IBT Stock Benefit Plans.
(ii) IBT owns all the outstanding shares of the capital stock of
Isabella Bank and Trust and of Farmers. Either IBT, Isabella Bank and Trust or
Farmers owns all the outstanding shares of the capital stock or all the equity
interest of each IBT Subsidiary.
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(iii) Except as set forth in Farmers Entity Disclosure Schedule
5.1(b)(iii), or as is set forth in the IBT proxy statement, to the Knowledge of
IBT or Farmers, no Person is the beneficial owner (as defined in Section 13(d)
of the Exchange Act) of 5% or more of the outstanding shares of IBT Common
Stock.
(iv) No bonds, debentures, notes or other indebtedness having the
right to vote on any matters on which IBT's shareholders may vote has been
issued by IBT and are outstanding.
(c) Authority.
(i) Farmers and IBT each have full corporate power and authority
to execute and deliver this Agreement and, subject to receipt of the required
Regulatory Approvals, to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement by Farmers and IBT and the completion
by Farmers and IBT of the transactions contemplated hereby, up to and including
the Merger, have been duly and validly approved by each of the Board of
Directors of Farmers and IBT, and no other corporate proceedings on the part of
Farmers or IBT are necessary to complete the transactions contemplated hereby,
up to and including the Merger. This Agreement has been duly and validly
executed and delivered by Farmers and IBT, and subject to the receipt of the
Regulatory Approvals described in Section 8.3 hereof constitutes the valid and
binding obligations of Farmers and IBT enforceable against Farmers and IBT in
accordance with its terms, subject to applicable bankruptcy, insolvency and
similar laws affecting creditors' rights generally, and subject, as to
enforceability, to general principles of equity.
(ii) (A) The execution and delivery of this Agreement by Farmers
and IBT, (B) subject to receipt of the Regulatory Approvals, and FSSB's and
Farmers' compliance with any conditions contained therein, and subject to the
receipt of the approval of the shareholders of FSSB, the consummation of the
transactions contemplated hereby, and (C) compliance by Farmers and IBT with any
of the terms or provisions hereof will not (i) conflict with or result in a
breach of any provision of the Articles of Incorporation or Bylaws of Farmers or
any Farmers Entity; (ii) violate any statute, code, ordinance, rule, regulation,
judgment, order, writ, decree or injunction applicable to Farmers or any Farmers
Entity or any of their respective properties or assets; or (iii) violate,
conflict with, result in a breach of any provisions of, constitute a default (or
an event which, with notice or lapse of time, or both, would constitute a
default), under, result in the termination of, accelerate the performance
required by, or result in a right of termination or acceleration or the creation
of any lien, security interest, charge or other encumbrance upon any of the
properties or assets of Farmers or any Farmers Entity under any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other investment or obligation to which any of them
is a party, or by which they or any of their respective properties or assets may
be bound or affected, except for such violations, conflicts, breaches or
defaults under clause (ii) or (iii) hereof which, either individually or in the
aggregate, will not have a Material Adverse Effect on Farmers and the Farmers
Entities taken as a whole.
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(d) Consents. Except for the Regulatory Approvals referred to in
Section 8.3 hereof and compliance with any conditions contained therein, and the
approval of this Agreement by the requisite vote of the shareholders of FSSB, no
consents, waivers or approvals of, or filings or registrations with, any
Governmental Entity or Bank Regulator are necessary, and, to the Knowledge of
Farmers and IBT, no consents, waivers or approvals of, or filings or
registrations with, any other third parties are necessary, in connection with
the execution and delivery of this Agreement by Farmers or IBT and the
completion by Farmers and IBT of the Merger. To Farmers' and IBT's knowledge,
(i) they have not received notice as of the date hereof that any Bank Regulator
intends to disapprove or object to the completion of the transactions
contemplated by this Agreement, and (ii) there is no reason to expect that all
Regulatory Approvals required for the consummation of the transactions
contemplated by this Agreement will not be received.
(e) Financial Statements.
(i) Farmers or a Farmers Entity has previously made available to
FSSB the IBT Financial Statements. The IBT Financial Statements have been
prepared in accordance with GAAP, and (including the related notes where
applicable) fairly present in each case in all material respects (subject in the
case of the unaudited interim statements to normal year-end adjustments) the
consolidated financial position, results of operations and cash flows of Farmers
and the Farmers Entities on a consolidated basis as of and for the respective
periods ending on the dates thereof, in accordance with GAAP during the periods
involved, except as indicated in the notes thereto, or in the case of unaudited
statements, as permitted by Form 10-Q.
(ii) At the date of each balance sheet included in the IBT
Financial Statements, neither Farmers nor any Farmers Entity had any liability,
obligation or loss contingency of any nature (whether absolute, accrued,
contingent or otherwise) of a type required to be reflected in such IBT
Financial Statements or in the footnotes thereto which were not fully reflected
or reserved against therein or fully disclosed in a footnote thereto, except for
liabilities, obligations and loss contingencies which were not material
individually or in the aggregate or which are incurred in the ordinary course of
business, consistent with past practice, and except for liabilities, obligations
and loss contingencies which are within the subject matter of a specific
representation and warranty herein and subject, in the case of any unaudited
statements, to normal, recurring audit adjustments and the absence of footnotes.
(f) Taxes. Farmers, IBT and the IBT Subsidiaries that are at least 80
percent owned by IBT are members of the same Affiliated group within the meaning
of Code Section 1504(a). IBT has duly filed all federal, state and material
local tax returns required to be filed by or with respect to Farmers and each
Farmers Entity on or prior to the Closing Date, taking into account any
extensions (all such returns, to the Knowledge of Farmers, being accurate and
correct in all material respects) and has duly paid or made provisions for the
payment of all material federal, state and local taxes which have been incurred
by or are due or claimed to be due from Farmers, IBT and any Significant
Subsidiary of IBT by any taxing authority or pursuant to any written tax sharing
agreement on or prior to the Closing Date other than taxes or other charges
which (i) are not delinquent, (ii) are being contested in good faith, or (iii)
have not yet been fully determined. As of the date of this Agreement, neither
Farmers nor any Farmers
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Entity has received notice of, and to the Knowledge of Farmers, there is no
audit examination, deficiency assessment, tax investigation or refund litigation
with respect to any taxes of Farmers, IBT or any of its Significant
Subsidiaries, and no claim has been made by any authority in a jurisdiction
where Farmers, IBT or any of its Significant Subsidiaries do not file tax
returns that Farmers, IBT or any such Significant Subsidiary is subject to
taxation in that jurisdiction. Except as set forth in Farmers Entity Disclosure
Schedule 5.1(f), Farmers, IBT and its Significant Subsidiaries have not executed
an extension or waiver of any statute of limitations on the assessment or
collection of any material tax due that is currently in effect. Farmers, IBT and
each of its Significant Subsidiaries has withheld and paid all taxes required to
have been withheld and paid in connection with amounts paid or owing to any
employee, independent contractor, creditor, shareholder or other third party,
and Farmers, IBT and each of its Significant Subsidiaries, to the Knowledge of
Farmers, has timely complied with all applicable information reporting
requirements under Part III, Subchapter A of Chapter 61 of the Code and similar
applicable state and local information reporting requirements.
(g) No Material Adverse Effect. Except as disclosed in IBT's
Securities Documents filed on or prior to the date hereof, Farmers and the
Farmers Entities, taken as a whole, have not suffered any Material Adverse
Effect since December 31, 2004 and to Farmers' Knowledge, no event has occurred
or circumstance arisen since that date which, in the aggregate, has had or is
reasonably likely to have a Material Adverse Effect on Farmers and the Farmers
Entities, taken as a whole.
(h) Ownership of Property; Insurance Coverage.
(i) Farmers and each Farmers Entity has good and, as to real
property, marketable title to all material assets and properties owned by
Farmers or any Farmers Entity in the conduct of its businesses, whether such
assets and properties are real or personal, tangible or intangible, including
assets and property reflected in the balance sheet contained in the most recent
IBT Financial Statements or acquired subsequent thereto (except to the extent
that such assets and properties have been disposed of in the ordinary course of
business, since the date of such balance sheet), subject to no material
encumbrances, liens, mortgages, security interests or pledges, except (i) those
items which secure liabilities for public or statutory obligations or any
discount with, borrowing from or other obligations to FHLB, inter-bank credit
facilities or any transaction by Farmers or IBT acting in a fiduciary capacity,
and (ii) statutory liens for amounts not yet delinquent or which are being
contested in good faith. Farmers and each Farmers Entity, as lessee, have the
right under valid and existing leases of real and personal properties used by
Farmers and each Farmers Entity in the conduct of their businesses to occupy or
use all such properties as presently occupied and used by each of them. Such
existing leases and commitments to lease constitute or will constitute operating
leases for both tax and financial accounting purposes and the lease expense and
minimum rental commitments with respect to such leases and lease commitments are
as disclosed in all material respects in the notes to the IBT Financial
Statements.
(ii) Farmers and each Farmers Entity currently maintain insurance
considered by each of them to be reasonable for their respective operations.
Neither Farmers nor any Farmers Entity has received notice from any insurance
carrier that (i) such insurance will be
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canceled or that coverage thereunder will be reduced or eliminated, or (ii)
premium costs with respect to such policies of insurance will be substantially
increased. There are presently no material claims pending under such policies of
insurance and no notices of material claims have been given by Farmers, or any
Farmers Entity under such policies. All such insurance is valid and enforceable
and in full force and effect, and within the last three (3) years Farmers and
each Farmers Entity has received each type of insurance coverage for which it
has applied and during such periods has not been denied indemnification for any
material claims submitted under any of its insurance policies. Farmers Entity
Disclosure Schedule 5.1(h) (ii) identifies all policies of insurance maintained
by Farmers and each Farmers Entity.
(i) Legal Proceedings. Except as disclosed in Farmers Entity
Disclosure Schedule 5.1(i), neither Farmers nor any Farmers Entity is a party to
any, and there are no pending or, to Farmers' and IBT's Knowledge, threatened
legal, administrative, arbitration or other proceedings, claims (whether
asserted or unasserted), actions or governmental investigations or inquiries of
any nature (i) against Farmers or any Farmers Entity, (ii) to which Farmers or
any Farmers Entity's assets are or may be subject, (iii) challenging the
validity or propriety of any of the transactions contemplated by this Agreement,
or (iv) which could adversely affect the ability of Farmers or any Farmers
Entity to perform under this Agreement, except for any proceeding, claim,
action, investigation or inquiry referred to in clauses (i) and (ii) which,
individually or in the aggregate, would not be reasonably expected to have a
Material Adverse Effect.
(j) Compliance with Applicable Law.
(i) To the Knowledge of Farmers and IBT, each of Farmers and each
Farmers Entity is in compliance in all material respects with all applicable
federal, state, local and foreign statutes, laws, regulations, ordinances,
rules, judgments, orders or decrees applicable to it, its properties, assets and
deposits, its business, and its conduct of business and its relationship with
its employees, including, without limitation, the USA PATRIOT Act, the Bank
Secrecy Act, the Equal Credit Opportunity Act, the Fair Housing Act, the CRA,
the Home Mortgage Disclosure Act, and all other applicable fair lending laws and
other laws relating to discriminatory business practices and neither Farmers nor
any Farmers Entity has received any written notice to the contrary.
(ii) Each of Farmers and each Farmers Entity has all material
permits, licenses, authorizations, orders and approvals of, and has made all
filings, applications and registrations with, all Bank Regulators that are
required in order to permit it to own or lease its properties and to conduct its
business as presently conducted; all such permits, licenses, certificates of
authority, orders and approvals are in full force and effect and, to the
Knowledge of Farmers, no suspension or cancellation of any such permit, license,
certificate, order or approval is threatened or will result from the
consummation of the transactions contemplated by this Agreement, subject to
obtaining the approvals set forth in Section 8.3.
(iii) For the period beginning January 1, 2003, neither Farmers
nor any Farmers Entity has received any written notification or, to the
Knowledge of Farmers, any other communication from any Bank Regulator (i)
asserting that Farmers or any Farmers Entity is not
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in material compliance with any of the statutes, regulations or ordinances which
such Bank Regulator enforces; (ii) threatening to revoke any license, franchise,
permit or governmental authorization which is material to Farmers or any Farmers
Entity; (iii) requiring or threatening to require Farmers or any Farmers Entity,
or indicating that Farmers or any Farmers Entity may be required, to enter into
a cease and desist order, agreement or memorandum of understanding or any other
agreement with any federal or state governmental agency or authority which is
charged with the supervision or regulation of banks or engages in the insurance
of bank deposits restricting or limiting, or purporting to restrict or limit, in
any material respect the operations of Farmers or any Farmers Entity, including
without limitation any restriction on the payment of dividends; or (iv)
directing, restricting or limiting, or purporting to direct, restrict or limit,
in any manner the operations of Farmers or any Farmers Entity, including without
limitation any restriction on the payment of dividends (any such notice,
communication, memorandum, agreement or order described in this sentence is
hereinafter referred to as a "Regulatory Agreement"). Neither Farmers nor any
Farmers Entity has consented to or entered into any currently effective
Regulatory Agreement. The most recent regulatory ratings given to Isabella Bank
and Trust and Farmers as to compliance with the CRA is satisfactory or better.
(k) IBT Common Stock. The shares of IBT Common Stock to be issued
pursuant to this Agreement, when issued in accordance with the terms of this
Agreement, will be duly authorized, validly issued, fully paid and
non-assessable and subject to no preemptive rights.
(l) Material Contracts; Leases, Defaults. Neither Farmers nor any
Farmers Entity is a party to or subject to: (i) any collective bargaining
agreement with any labor union relating to employees of Farmers or any Farmers
Entity; nor (ii) any agreement which by its terms limits the payment of
dividends by Farmers or any Farmers Entity.
(m) Securities Documents. IBT has made available to FSSB copies of its
(i) annual reports on Form 10-K for the years ended December 31, 2004, 2003 and
2002, (ii) quarterly reports on Form 10-Q for the quarters ended March 31, 2005,
June 30 2005 and September 30, 2005, and (iii) proxy materials used or for use
in connection with its meetings of shareholders held in 2005, 2004 and 2003.
Such reports and proxy materials complied, at the time filed with the SEC, in
all material respects, with the Securities Laws.
(n) Reorganization. Farmers and IBT have no knowledge of any reason
why the Merger would fail to qualify as a reorganization under Section 368(a) of
the Code.
(o) Information Supplied. None of the information supplied or to be
supplied by Farmers or any Farmers Entity for inclusion or incorporation by
reference in (i) the S-4 will, at the time the S-4 becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading and (ii) the Proxy Statement and any amendment
or supplement thereto will, at the date of mailing to FSSB shareholders and at
the time of the meeting of shareholders of FSSB to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading. The Proxy Statement (except
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for such portions thereof that relate only to FSSB) will comply in all material
respects with the provisions of the Exchange Act and the rules and regulations
thereunder, and the S-4 (except for such portions thereof that relate only to
FSSB) will comply in all material respects with the provisions of the Securities
Act and the rules and regulations thereunder.
(p) Required Vote. Only the vote of the sole stockholder of Farmers is
required by law, by Farmer's Articles of Incorporation or Bylaws, or otherwise
to approve this Agreement and the Merger on behalf of the Farmers Entities.
(q) Merger Consideration. As of the Closing Date and subject to
Article IX, IBT will have cash and authorized shares of IBT Common Stock in the
aggregate amount of the Merger Consideration available for deposit with the
Exchange Agent.
(r) Pro Forma Capital Requirements. Farmers is, and on a pro forma
basis giving effect for the transactions contemplated by this Agreement and any
financing or capital injection contemplated by IBT, will be "adequately
capitalized" as defined for purposes of the Federal Deposit Insurance Act and
applicable regulations.
(s) Brokers, Finders and Financial Advisors. Neither IBT, Farmers nor
any Farmers Entity, nor any of their respective officers, directors, employees
or agents, has employed any broker, finder or financial advisor other than
Austin Associates, LLC in connection with the transactions contemplated by this
Agreement, or incurred any liability or commitment for any fees or commissions
to any such person other than Austin Associates, LLC in connection with the
transactions contemplated by this Agreement.
(t) Employee Benefit Plans.
(i) Except as disclosed in Farmers Entity Disclosure Schedule
5.1(t)(i), each bonus, incentive, deferred compensation, pension, retirement,
profit-sharing, thrift, savings, employee stock ownership, stock bonus, stock
purchase, restricted stock, stock option, stock appreciation, phantom stock,
severance, welfare benefit plans, fringe benefit plans, employment, severance
and change in control agreements and all other material benefit practices,
policies and arrangements maintained by Farmers or any Farmers Entity (the
"Farmers Entity Plans") has been operated and administered in all material
respects in accordance with its terms and with applicable law, including, but
not limited to, ERISA, the Code, the Securities Act, the Exchange Act, the Age
Discrimination in Employment Act, COBRA, the Health Insurance Portability and
Accountability Act and any regulations or rules promulgated thereunder, and all
material filings, disclosures and notices required by ERISA, the Code, the
Securities Act, the Exchange Act, the Age Discrimination in Employment Act and
any other applicable law have been timely made or any interest, fines, penalties
or other impositions for late filings have been paid in full. Each Farmers
Entity Plan which is an "employee pension benefit plan" within the meaning of
Section 3(2) of ERISA (a "Pension Plan") and which is intended to be qualified
under Section 401(a) of the Code has received a favorable determination letter
from the IRS, and Farmers is not aware of any circumstances which are reasonably
likely to result in revocation of any such favorable determination letter. There
is no material pending or, to the Knowledge of Farmers or IBT, threatened
action, suit or claim relating to any of the Compensation and Benefit Plans
(other than
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routine claims for benefits). Neither Farmers nor any Farmers Entity has engaged
in a transaction, or omitted to take any action, with respect to any
Compensation and Benefit Plan that would reasonably be expected to subject
Farmers or any Farmers Entity to an unpaid tax or penalty imposed by either
Section 4975 of the Code or Section 502 of ERISA.
(ii) Except as set forth in Farmers Entity Disclosure Schedule
5.1(t)(ii), no liability, other than PBGC premiums arising in the ordinary
course of business, has been or is expected by Farmers or any Farmers Entity to
be incurred with respect to any Farmers Entity Plan which is a defined benefit
plan subject to Title IV of ERISA ("Farmers Entity Defined Benefit Plan"), or
with respect to any "single-employer plan" (as defined in Section 4001(a) of
ERISA) currently or formerly maintained by Farmers, any Farmers Entity or any
entity which is considered one employer with Farmers under Section 4001(b)(1) of
ERISA or Section 414 of the Code (a "Farmers Entity ERISA Affiliate") (such plan
hereinafter referred to as a "Farmers Entity ERISA Affiliate Plan"). To the
Knowledge of Farmers and IBT, except as set forth in Farmers Entity Disclosure
Schedule 5.1(t)(ii), no Farmers Entity Defined Benefit Plan had an "accumulated
funding deficiency" (as defined in Section 302 of ERISA), whether or not waived,
as of the last day of the end of the most recent plan year ending prior to the
date hereof. Except as set forth in Farmers Entity Disclosure Schedule
5.1(t)(ii), the fair market value of the assets of each Farmers Entity Defined
Benefit Plan exceeds the present value of the benefits guaranteed under Section
4022 of ERISA under such Farmers Entity Defined Benefit Plan as of the end of
the most recent plan year with respect to the respective Farmers Entity Defined
Benefit Plan ending prior to the date hereof, calculated on the basis of the
actuarial assumptions used in the most recent actuarial valuation for such
Farmers Entity Defined Benefit Plan as of the date hereof; and no notice of a
"reportable event" (as defined in Section 4043 of ERISA) for which the 30-day
reporting requirement has not been waived has been required to be filed for any
Farmers Entity Defined Benefit Plan within the 12-month period ending on the
date hereof. Except as set forth in Farmers Entity Disclosure Schedule
5.1(t)(ii), neither Farmers nor any Farmers Entity has provided, or is required
to provide, security to any Farmers Entity Defined Benefit Plan or to any
single-employer plan of a Farmers Entity ERISA Affiliate pursuant to Section
401(a)(29) of the Code or has taken any action, or omitted to take any action,
that has resulted, or would reasonably be expected to result in the imposition
of a lien under Section 412(n) of the Code or pursuant to ERISA. To the
Knowledge of Farmers and IBT, and except as set forth in Farmers Entity
Disclosure Schedule 5.1(t)(ii), there is no pending investigation or enforcement
action by any Bank Regulator with respect to any Farmers Plan or any Farmers
Entity ERISA Affiliate Plan.
(iii) With respect to any Farmers Entity Defined Benefit Plan
that is a "multi-employer plan" as such term is defined in Section 3(37) of
ERISA, covering employees of Farmers, any Farmers Entity or any Farmers Entity
ERISA Affiliate, (i) neither Farmers, any Farmers Entity, nor any Farmers Entity
ERISA Affiliate has made or suffered a "complete withdrawal" or "partial
withdrawal," as such terms are respectively defined in Sections 4203 and 4205 of
ERISA, (ii) no event has occurred, and no circumstances exist, that alone or
with the passage of time present a material risk of a complete or partial
withdrawal, and (iii) neither Farmers, any Farmers Entity, or any Farmers Entity
ERISA Affiliate has any contingent liability under Section 4204 of ERISA and no
circumstances exist that present a material risk that any such plan will go into
reorganization. Farmers Entity Disclosure Schedule 5.1(t)(iii) lists IBT's
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best estimate of the amount of withdrawal liability that would be incurred if
Farmers, each Farmers Entity and each Farmers Entity ERISA Affiliate were to
make a complete withdrawal from such plan as of the Effective Time and also
states the aggregate withdrawal liability of Farmers, the Farmers Entities and
the Farmers Entity ERISA Affiliates. There are no "unfunded vested benefits"
(within the meaning of Section 4211 of ERISA) as of the end of the most recently
completed plan year and as of the date of this Agreement.
(iv) All material contributions required to be made under the
terms of any Farmers Plan or Farmers Entity ERISA Affiliate Plan or any employee
benefit arrangements to which Farmers or any Farmers Entity is a party or a
sponsor have been timely made, and all anticipated contributions and funding
obligations are accrued on IBT's consolidated financial statements to the extent
required by GAAP. Farmers or any Farmers Entity have expensed and accrued as a
liability the present value of future benefits under each applicable Farmers
Entity Plan for financial reporting purposes as required by GAAP.
(v) Neither Farmers nor any Farmers Entity has any obligations to
provide retiree health, life insurance, disability insurance, or other retiree
death benefits under any Farmers Entity Plan, other than benefits mandated by
Section 4980B of the Code.
(u) Loan Portfolio.
(i) To IBT's Knowledge, the allowance for loan losses reflected
in the notes to IBT's audited consolidated statement of financial condition at
December 31, 2004 was, and the allowance for loan losses shown in the notes to
the IBT's unaudited consolidated financial statements for periods ending after
December 31, 2004 were, or will be, adequate, as of the dates thereof, under
GAAP.
(ii) Farmers Entity Disclosure Schedule 5.1(u) sets forth a
listing, as of the most recently available date, by account, of all loans having
a principal balance in excess of $750,000 (1) that are contractually past due 90
days or more in the payment of principal and/or interest, (2) that are on
non-accrual status, (3) that as of the date of this Agreement are classified as
"Other Loans Specifically Mentioned", "Special Mention", "Substandard",
"Doubtful", "Loss", "Classified", "Criticized", "Watch list" or words of similar
import, together with the principal amount of and accrued and unpaid interest on
each such loan and the identity of the obligor thereunder, (4) where the
interest rate terms have been reduced and/or the maturity dates have been
extended subsequent to the agreement under which the loan was originally created
due to concerns regarding the borrower's ability to pay in accordance with such
initial terms, or (5) where a specific reserve allocation exists in connection
therewith.
(iii) All loans receivable (including discounts) and accrued
interest entered on the books of Farmers and the Farmers Entities arose out of
bona fide arm's-length transactions, were made for good and valuable
consideration in the ordinary course of Farmers' or the appropriate Farmers
Entity's respective business, and the notes or other evidences of indebtedness
with respect to such loans (including discounts) are true and genuine and are
what they purport to be, other than loans as to which the failure to satisfy the
foregoing standards would not have a Material Adverse Effect on Farmers or any
of the Farmers Entities.
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ARTICLE VI - COVENANTS OF FSSB
6.1. Conduct of Business.
(a) Affirmative Covenants. During the period from the date of this
Agreement to the Effective Time, except with the written consent of Farmers,
which consent will not be unreasonably withheld, conditioned or delayed, FSSB
will, and will cause each FSSB Subsidiary to: operate its business only in the
usual, regular and ordinary course of business; use reasonable efforts to
preserve intact its business organization and assets and maintain its rights and
franchises; and voluntarily take no action which would: (i) adversely affect the
ability of the parties to obtain the Regulatory Approvals or materially increase
the period of time necessary to obtain such approvals, or (ii) adversely affect
its ability to perform its covenants and agreements under this Agreement.
(b) Negative Covenants. FSSB agrees that from the date of this
Agreement to the Effective Time, except as otherwise specifically permitted or
required by this Agreement, set forth in FSSB Disclosure Schedule 6.1(b), or
consented to by Farmers in writing (which consent shall not be unreasonably
withheld, conditioned or delayed), it will not, and it will cause each of the
FSSB Subsidiaries not to:
(i) change or waive any provision of its Articles of
Incorporation, Charter or Bylaws, except as required by law;
(ii) change the number of authorized or issued shares of its
capital stock, issue any shares of FSSB Common Stock that are held as "treasury
shares" as of the date of this Agreement, or issue or grant any Right or
agreement of any character relating to its authorized or issued capital stock or
any securities convertible into shares of such stock, make any grant or award
under any FSSB Stock Benefit Plan, or split, combine or reclassify any shares of
capital stock, or declare, set aside or pay any dividend or other distribution
in respect of capital stock other than dividends issued consistent with the past
practice of FSSB, or redeem or otherwise acquire any shares of capital stock;
(iii) enter into, amend in any material respect or terminate any
material contract or agreement (including without limitation any settlement
agreement with respect to litigation) except in the ordinary course of business;
(iv) make application for the opening or closing of any, or open
or close any, branch or automated banking facility, except as required by any
Bank Regulator;
(v) except as agreed to or incurred prior to the date of this
Merger Agreement, grant or agree to pay any bonus, severance or termination to,
or enter into, renew or amend any employment agreement, severance agreement
and/or supplemental executive agreement with, or increase in any manner the
compensation or fringe benefits of, any of its directors, officers or employees
except that FSSB may (A) authorize compensation increases including bonuses to
officers in the ordinary course of business not to exceed $10,000 in the
aggregate, after the execution of this Agreement through December 31, 2005, and
(B) hire at-
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will, non-officer employees to fill vacancies that may from time to time arise
in the ordinary course of business;
(vi) enter into or, except as may be required by law, materially
modify any pension, retirement, stock option, stock purchase, stock appreciation
right, stock grant, savings, profit sharing, deferred compensation, supplemental
retirement, consulting, bonus, group insurance or other employee benefit,
incentive or welfare contract, plan or arrangement, or any trust agreement
related thereto, in respect of any of its directors, officers or employees; or
make any contributions to any defined contribution or defined benefit plan other
than regularly scheduled contributions consistent with past practice, without
the prior consent of Farmers;
(vii) merge or consolidate FSSB or any FSSB Subsidiary with any
other corporation; sell or lease all or any substantial portion of the assets or
business of FSSB or any FSSB Subsidiary; make any acquisition of all or any
substantial portion of the business or assets of any other Person other than in
connection with foreclosures, settlements in lieu of foreclosure, troubled loan
or debt restructuring, or the collection of any loan or credit arrangement
between FSSB, or any FSSB Subsidiary, and any other Person; enter into a
purchase and assumption transaction with respect to deposits and liabilities;
permit the revocation or surrender by any FSSB Subsidiary of its certificate of
authority to maintain, or file an application for the relocation of, any
existing branch office, or file an application for a certificate of authority to
establish a new branch office;
(viii) sell or otherwise dispose of the capital stock of FSSB or
sell or otherwise dispose of any asset of FSSB or of any FSSB Subsidiary other
than in the ordinary course of business consistent with past practice; except
for transactions with the FHLB, subject any asset of FSSB or of any FSSB
Subsidiary to a lien, pledge, security interest or other encumbrance (other than
in connection with deposits, repurchase agreements, bankers acceptances,
"treasury tax and loan" accounts established in the ordinary course of business
and transactions in "federal funds" and the satisfaction of legal requirements
in the exercise of trust powers) other than in the ordinary course of business
consistent with past practice; incur any indebtedness for borrowed money (or
guarantee any indebtedness for borrowed money), except in the ordinary course of
business consistent with past practice;
(ix) take any action which would result in any of the
representations and warranties of FSSB set forth in this Agreement becoming
untrue as of any date after the date hereof or in any of the conditions set
forth in Article IX hereof not being satisfied, except in each case as may be
required by applicable law;
(x) change any method, practice or principle of accounting,
except as may be required from time to time by GAAP (without regard to any
optional early adoption date) or any Bank Regulator responsible for regulating
FSSB;
(xi) waive, release, grant or transfer any material rights of
value or modify or change in any material respect any existing material
agreement or indebtedness to which FSSB or any FSSB Subsidiary is a party, other
than in the ordinary course of business, consistent with past practice;
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(xii) purchase any equity securities, or purchase any security
for its investment portfolio inconsistent with FSSB's or any FSSB Subsidiary's
current investment policy;
(xiii) except for commitments issued prior to the date of this
Agreement which have not yet expired and which have been disclosed on the FSSB
Disclosure Schedule 6.1(b)(xiii), and the renewal of existing lines of credit,
make any new loan or other credit facility commitment (including without
limitation, lines of credit and letters of credit) in an amount in excess of
$500,000 for a commercial real estate loan, $250,000 for a construction loan,
$250,000 for a commercial business loan, or in excess of $500,000 for a
residential loan, except that if Farmers does not object within 24 hours after
confirmation of receipt of notification from FSSB of an intent to originate a
loan in excess of the amounts set forth in this paragraph, consent shall be
deemed to have been given by Farmers. Notwithstanding Section 12.4, notice under
this Section 6.1(b)(xiii) may also be provided by facsimile or electronic mail;
(xiv) except as set forth on the FSSB Disclosure Schedule
6.1(b)(xiv), enter into, renew, extend or modify any other transaction (other
than a deposit transaction) with any Affiliates other than pursuant to FSSB's
existing insider loan policy;
(xv) enter into any futures contract, option, interest rate caps,
interest rate floors, interest rate exchange agreement or other agreement or
take any other action for purposes of hedging the exposure of its
interest-earning assets and interest-bearing liabilities to changes in market
rates of interest except in the ordinary course of business consistent with past
practice;
(xvi) except for the execution of this Agreement, and actions
taken or which will be taken in accordance with this Agreement and performance
thereunder, take any action that would give rise to a right of payment to any
individual under any employment agreement;
(xvii) make any change in policies in existence on the date of
this Agreement with regard to: the extension of credit, or the establishment of
reserves with respect to the possible loss thereon or the charge off of losses
incurred thereon; investments; asset/liability management; or other material
banking policies in any material respect except as may be required by changes in
applicable law or regulations, by a Bank Regulator, or in the discretion of the
FSSB board of directors, consistent with prudent banking practice, in which case
FSSB shall give prior notice to Farmers;
(xviii) except for the execution of this Agreement, and the
transactions contemplated herein, take any action that would give rise to an
acceleration of the right to payment to any individual under any FSSB
Compensation and Benefit Plan;
(xix) except as set forth in FSSB Disclosure Schedule
6.1(b)(xix), make any capital expenditures in excess of $25,000 individually and
in the aggregate, other than pursuant to binding commitments existing on the
date hereof and other than expenditures necessary to maintain existing assets in
good repair;
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(xx) except as set forth in FSSB Disclosure Schedule 6.1(b)(xx),
purchase or otherwise acquire, or sell or otherwise dispose of, any assets or
incur any liabilities other than in the ordinary course of business consistent
with past practices and policies and other than the sale or disposal or worn,
surplus or replaced equipment;
(xxi) sell any participation interest in any loan (other than
sales of loans secured by one- to four-family real estate that are consistent
with past practice) unless Farmers has been given prior written notice of any
loan participation being sold;
(xxii) undertake or enter into any lease, contract or other
commitment for its account, other than in the normal course of banking business;
(xxiii) pay, discharge, settle or compromise any claim, action,
litigation, arbitration or proceeding in an amount exceeding $10,000; or
(xxiv) agree to do any of the foregoing.
6.2. Current Information.
(a) Subject to Section 12.1 hereof, during the period from the date of
this Agreement to the Effective Time, FSSB will cause one or more of its
representatives to confer with representatives of Farmers or a designated
Farmers Entity and report the general status of its ongoing operations at such
times as Farmers or a designated Farmers Entity may reasonably request. FSSB
will promptly notify Farmers or a designated Farmers Entity of any material
change in the normal course of its business or in the operation of its
properties and, to the extent permitted by applicable law, of any governmental
complaints, investigations or hearings (or communications indicating that the
same may be contemplated), or the institution or the threat of material
litigation involving FSSB or any FSSB Subsidiary.
(b) Subject to Section 12.1 hereof, FSSB shall provide Farmers or a
designated Farmers Entity, within thirty (30) days after the end of each month,
a written list of (i) nonperforming assets (the term "nonperforming assets" for
purposes of this subsection, means loans that are "troubled debt restructuring"
as defined in Statement of Financial Accounting Standards No. 15, "Accounting by
Debtors and Creditors for Troubled Debt Restructuring,"), (ii) loans on
nonaccrual, (iii) real estate owned, (iv) all loans ninety (90) days or more
past due as of the end of such month, and (v) impaired loans. On a monthly
basis, FSSB shall provide Farmers or a designated Farmers Entity with a schedule
of all loan approvals, which schedule shall indicate the loan amount, loan type
and other material features of the loan.
(c) FSSB shall promptly inform Farmers or a designated Farmers Entity
upon receiving notice of any legal, administrative, arbitration or other
proceedings, demands, notices, audits or investigations (by any federal, state
or local commission, agency or board) relating to the alleged liability of FSSB
or any FSSB Subsidiary under any labor or employment law.
6.3. Access to Properties and Records. Subject to Section 12.1 hereof, FSSB
shall permit Farmers or a designated Farmers Entity access upon reasonable
notice to its properties and those of the FSSB Subsidiaries, and shall disclose
and make available to Farmers or a
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designated Farmers Entity to the extent permitted by applicable law during
normal business hours all of its books, papers and records relating to the
assets, properties, operations, obligations and liabilities, including, but not
limited to, all books of account (including the general ledger), tax records,
minute books of directors' (other than minutes that discuss any of the
transactions contemplated by this Agreement or any other subject matter FSSB
reasonably determines should be treated as confidential or privileged) and
shareholders' meetings, organizational documents, bylaws, material contracts and
agreements, filings with any regulatory authority, litigation files (to the
extent not resulting in waiver of attorney-client privilege), plans affecting
employees, and any other business activities or prospects in which Farmers may
have a reasonable interest. FSSB shall provide and shall request its auditors to
provide Farmers or a designated Farmers Entity with such historical financial
information regarding it (and related audit reports and consents) as Farmers or
a designated Farmers Entity may request for securities disclosure purposes. FSSB
and each FSSB Subsidiary shall permit, upon reasonable notice, Farmers or a
designated Farmers Entity at its own expense to cause a "phase I environmental
audit" and a "phase II environmental audit" to be performed at any physical
location owned or occupied by FSSB or any FSSB Subsidiary. Farmers shall
indemnify and hold harmless FSSB for any claim, suit, liability, cost, expense
or damages whatsoever arising out of or related to such environmental audits or
any other inspection or due diligence activity conducted on FSSB's premises.
6.4. Financial and Other Statements.
(a) Promptly upon receipt thereof, FSSB will furnish to Farmers copies
of each annual, interim or special audit of the books of FSSB and the FSSB
Subsidiaries made by its independent accountants and copies of all internal
control reports submitted to FSSB by such accountants in connection with each
annual, interim or special audit of the books of FSSB and the FSSB Subsidiaries
made by such accountants.
(b) Promptly after FSSB's board meeting but no later than thirty (30)
days after the end of each month, FSSB will deliver to Farmers a consolidated
balance sheet and a consolidated statement of operations, without related notes,
for such month prepared in accordance with current financial reporting
practices.
(c) FSSB will advise Farmers promptly of the receipt of any
examination report of any Bank Regulator with respect to the condition or
activities of FSSB or any of the FSSB Subsidiaries.
(d) With reasonable promptness, FSSB will furnish to Farmers such
additional financial data that FSSB possesses and as Farmers may reasonably
request, including without limitation, detailed monthly financial statements and
loan reports.
6.5. Maintenance of Insurance. FSSB shall maintain and cause the FSSB
Subsidiaries to maintain, insurance in such amounts as are reasonable to cover
such risks as are customary in relation to the character and location of its
properties and the nature of its business.
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6.6. Disclosure Supplements. From time to time prior to the Effective Time,
FSSB will promptly supplement or amend the FSSB Disclosure Schedule delivered in
connection herewith with respect to any matter hereafter arising which, if
existing, occurring or known at the date of this Agreement, would have been
required to be set forth or described in such FSSB Disclosure Schedule or which
is necessary to correct any information in such FSSB Disclosure Schedule which
has been rendered materially inaccurate thereby.
6.7. Consents and Approvals of Third Parties. FSSB shall use all
commercially reasonable efforts, and shall cause each FSSB Subsidiary to use all
commercially reasonable efforts to obtain as soon as practicable all consents
and approvals of any other Persons necessary or desirable for the consummation
of the transactions contemplated by this Agreement.
6.8. All Reasonable Efforts. Subject to the terms and conditions herein
provided, FSSB agrees to use all commercially reasonable efforts to take, or
cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement,
except to the extent that such action, in the good faith determination of the
board of directors of FSSB after consultation with legal counsel, may result in
a breach of fiduciary duty by the FSSB board of directors.
6.9. Failure to Fulfill Conditions. In the event that FSSB determines that
a condition to its obligation to complete the Merger cannot be fulfilled and
that it will not waive that condition, it will promptly notify Farmers.
6.10. No Solicitation. From and after the date hereof until the termination
of this Agreement, neither FSSB, nor any FSSB Subsidiary, nor any of their
respective officers, directors, employees, representatives, agents and
Affiliates (including, without limitation, any investment banker, attorney or
accountant retained by FSSB or any of the FSSB Subsidiaries), will, directly or
indirectly, initiate, solicit or knowingly encourage (including by way of
furnishing non-public information or assistance) any inquiries or the making of
any proposal that constitutes, or may reasonably be expected to lead to, any
Acquisition Proposal (as defined below), or enter into or maintain or continue
discussions or negotiate with any Person in furtherance of such inquiries or to
obtain an Acquisition Proposal or agree to or endorse any Acquisition Proposal,
or authorize or permit any of its officers, directors, or employees or any of
its Subsidiaries or any investment banker, financial advisor, attorney,
accountant or other representative retained by any of its Subsidiaries to take
any such action, and FSSB shall notify Farmers orally (within one business day)
and in writing (as promptly as practicable) of all of the relevant details
relating to all inquiries and proposals which it or any of its Subsidiaries or
any such officer, director or employee, or, to FSSB's Knowledge, investment
banker, financial advisor, attorney, accountant or other representative of FSSB
may receive relating to any of such matters, provided, however, that nothing
contained in this Section 6.10 shall prohibit the Board of Directors of FSSB
from (i) complying with its disclosure obligations under federal or state law;
or (ii) furnishing information to, or entering into discussions or negotiations
with, any person or entity that makes an unsolicited Acquisition Proposal, if,
and only to the extent that, (A) the Board of Directors of FSSB determines in
good faith (after consultation with its financial and legal advisors), taking
into account all legal, financial and regulatory aspects of the proposal
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and the Person making the proposal, that such proposal, if consummated, is
reasonably likely to result in a transaction more favorable to FSSB's
shareholders from a financial point of view than the Merger; (B) the Board of
Directors of FSSB determines in good faith (after consultation with its
financial and legal advisors) that the failure to furnish information to or
enter into discussions with such Person would likely cause the Board of
Directors to breach its fiduciary duties to shareholders under applicable law
(such proposal that satisfies clause (A) and (B) being referred to herein as a
"Superior Proposal"); and (C) FSSB promptly notifies Farmers of such inquiries,
proposals or offers received by, any such information requested from, or any
such discussions or negotiations sought to be initiated or continued with FSSB
or any of its representatives indicating, in connection with such notice, the
name of such Person and the material terms and conditions of any inquiries,
proposals or offers, and receives from such Person an executed confidentiality
agreement in form and substance identical in all material respects to the
confidentiality agreements that FSSB and IBT entered into. For purposes of this
Agreement, "Acquisition Proposal" shall mean any proposal or offer as to any of
the following (other than the transactions contemplated hereunder) involving
FSSB or any of its Subsidiaries: (i) any merger, consolidation, share exchange,
business combination, or other similar transactions; (ii) any sale, lease,
exchange, mortgage, pledge, transfer or other disposition of 25% or more of the
assets of FSSB and the FSSB Subsidiaries, taken as a whole, in a single
transaction or series of transactions; (iii) any sale or tender offer or
exchange offer for 25% or more of the outstanding shares of capital stock of
FSSB or the filing of a registration statement under the Securities Act in
connection therewith; or (iv) any public announcement of a proposal, plan or
intention to do any of the foregoing or any agreement to engage in any of the
foregoing.
6.11. Sarbanes-Oxley Certification of Financial Statements. The Chief
Executive Officer and the Chief Financial Officer of FSSB shall certify the FSSB
Financial Statements in the form attached as Exhibit A.
6.12. FSSB Audit for 2005. FSSB's external audit for the year ending
December 31, 2005 shall be conducted by an auditor that is independent from FSSB
in accordance with Section 201 of the Sarbanes-Oxley Act of 2002 and the
regulations promulgated thereunder.
ARTICLE VII - COVENANTS OF FARMERS
7.1. Conduct of Business. During the period from the date of this Agreement
to the Effective Time, except with the written consent of FSSB, which consent
will not be unreasonably withheld, conditioned or delayed, Farmers and IBT will,
and they will cause each Farmers Entity to: conduct its business only in the
usual, regular and ordinary course consistent with past practices; use
reasonable efforts to preserve intact its business organization and assets and
maintain its rights and franchises; and voluntarily take no action that would:
(i) adversely affect the ability of the parties to obtain the Regulatory
Approvals or materially increase the period of time necessary to obtain such
approvals; (ii) adversely affect its ability to perform its covenants and
agreements under this Agreement; (iii) result in the representations and
warranties contained in Article V of this Agreement not being true and correct
on the date of this Agreement or at any future date on or prior to the Closing
Date or in any of the conditions set forth in Article IX hereof not being
satisfied; (iv) change or waive any provision of its Articles of Incorporation,
except as required by law; or (v) change any method, practice or principle of
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accounting, except as may be required from time to time by GAAP (without regard
to any optional early adoption date) or any Bank Regulator responsible for
regulating IBT, Isabella Bank and Trust or Farmers. Additionally, IBT will not
declare an extraordinary dividend or distribution on shares of IBT Common Stock.
7.2. Disclosure Supplements. From time to time prior to the Effective Time,
Farmers and IBT will promptly supplement or amend the Farmers Entity Disclosure
Schedule delivered in connection herewith with respect to any matter hereafter
arising which, if existing, occurring or known at the date of this Agreement,
would have been required to be set forth or described in such Farmers Entity
Disclosure Schedule or which is necessary to correct any information in such
Farmers Entity Disclosure Schedule which has been rendered inaccurate thereby.
7.3. Consents and Approvals of Third Parties. Farmers shall use all
commercially reasonable efforts to obtain as soon as practicable all consents
and approvals of any other Persons necessary or desirable for the consummation
of the transactions contemplated by this Agreement.
7.4. All Reasonable Efforts. Subject to the terms and conditions herein
provided, Farmers agrees to use all commercially reasonable efforts to take, or
cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement.
7.5. Failure to Fulfill Conditions. In the event that Farmers determines
that a condition to its obligation to complete the Merger cannot be fulfilled
and that it will not waive that condition, it will notify FSSB.
7.6. Employee Benefits. Farmers and IBT shall, from and after the Effective
Time until January 1, 2008, continue the defined contribution plan of FSSB in
effect immediately preceding the Effective Time. Effective January 1, 2008, or
as required by ERISA, Farmers and IBT shall cause the employee pension benefit
plans of IBT (as defined under ERISA) to be adopted by Farmers for all FSSB
employees who were employed as of the Effective Time (the "Former FSSB
Employees"). All Former FSSB Employees who become participants in an IBT
employee pension benefit plan covered under ERISA shall, for purposes of
determining eligibility for and for any applicable vesting periods of such
employee benefits only (and not for benefit accrual purposes) be given credit
for meeting eligibility and vesting requirements in such plans for service as an
employee of FSSB or any predecessor thereto prior to the Effective Time. All
Former FSSB Employees who become participants in the plans of IBT shall receive
aggregate annual employer contributions of 15% of salary into such plans. To the
extent said contributions do not equal at least 15% of salary, said shortfall
shall be made up as additional salary or pursuant to a contribution to a
non-qualified plan for affected employees, as determined in the sole discretion
of Farmers. This Agreement shall not be construed to limit the ability of
Farmers or the Farmers Entities to terminate the employment of any employee or
to review employee pension benefits programs from time to time and to make such
changes as it may deem appropriate. Farmers and IBT shall, from and after the
Effective Time, continue in effect any material welfare benefit plan, life
insurance, group health plan or disability plan in which the
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employees of FSSB participated immediately prior to the Effective Time (or an
arrangement providing substantially similar benefits). Farmers and the Farmers
Entities shall not take any action which would adversely affect the employees of
FSSB participation in or materially reduce any benefits under any such plan or
arrangement. Nothing contained in this subsection shall limit Farmers' or any
Farmers Entity's right to amend or terminate any plan or arrangement to conform
such plan or arrangement to statutory or regulatory requirements applicable to
such plan or arrangement.
7.7. Access to Properties and Records. Subject to Section 12.1 hereof,
Farmers and IBT shall permit FSSB access upon reasonable notice to their
properties, and shall disclose and make available to FSSB to the extent
permitted by applicable law during normal business hours all of its books,
papers and records relating to the assets, properties, operations, obligations
and liabilities, including, but not limited to, all books of account (including
the general ledger), tax records, minute books of directors' (other than minutes
that discuss any of the transactions contemplated by this Agreement or any other
subject matter IBT reasonably determines should be treated as confidential or
privileged) and shareholders' meetings, organizational documents, bylaws,
material contracts and agreements, filings with any regulatory authority,
litigation files (to the extent not resulting in waiver of attorney-client
privilege), plans affecting employees, and any other business activities or
prospects in which FSSB may have a reasonable interest. IBT shall provide and
shall request IBT's auditors to provide FSSB with such historical financial
information regarding it (and related audit reports and consents) as FSSB may
request.
7.8. Financial and Other Statements.
(a) Promptly upon receipt thereof, IBT shall furnish to FSSB copies of
each annual, interim or special audit of the books of IBT made by its
independent accountants and copies of all internal control reports submitted to
IBT by such accountants in connection with each annual, interim or special audit
of the books of IBT made by such accountants.
(b) Promptly after IBT's board meeting but no later than thirty (30)
days after the end of each month, Farmers shall cause IBT to deliver to FSSB a
consolidated balance sheet and a consolidated statement of operations, without
related notes, for such month prepared in accordance with current financial
reporting practices.
(c) Farmers and IBT shall advise FSSB promptly of the receipt of any
examination report of any Bank Regulator with respect to the condition or
activities of IBT, Farmers or any IBT Subsidiaries.
(d) With reasonable promptness, IBT shall furnish to FSSB such
additional financial data that IBT possesses and as FSSB may reasonably request,
including without limitation, detailed monthly financial statements and loan
reports.
7.9. Directors and Officers Indemnification; Insurance.
(a) From and after the Effective Time through the fifth anniversary of
the Effective Time, Farmers and the Farmers Entities (collectively the
"Indemnifying Party") shall indemnify and hold harmless each present and former
director, officer and employee of FSSB,
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determined as of the Effective Time (the "Indemnified Parties") against any
costs or expenses (including reasonable attorneys' fees), judgments, fines,
losses, claims, damages or liabilities incurred in connection with any claim,
action, suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of matters existing or occurring at
or prior to the Effective Time, whether asserted or claimed prior to, at or
after the Effective Time, arising in whole or in part out of or pertaining to
the fact that he or she was a director, officer, employee, fiduciary or agent of
FSSB or any FSSB Subsidiary or is or was serving at the request of FSSB or any
FSSB Subsidiary as a director, officer, employee, fiduciary or agent of another
corporation, partnership, joint venture, trust or other enterprise, including
without limitation matters related to the negotiation, execution and performance
of this Agreement or the consummation of the Merger, to the fullest extent which
indemnification is permitted under the applicable provisions of the Michigan
Banking Code, MCL 487.13904 through 487.13907, as in effect on the date hereof
or in the event any subsequent amendment thereto expands the permissible scope
of indemnification, then as amended.
(b) Any Indemnified Party wishing to claim indemnification under this
Section 7.9 hereof, upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify the Indemnifying Party, but the failure to
so notify shall not relieve the Indemnifying Party of any liability it may have
to such Indemnified Party if such failure does not actually prejudice the
Indemnifying Party. In the event of any such claim, action, suit, proceeding or
investigation (whether arising before or after the Effective Time), (i) the
Indemnifying Party shall have the right to assume the defense thereof and the
Indemnifying Party shall not be liable to such Indemnified Parties for any legal
expenses of other counsel or any other expenses subsequently incurred by such
Indemnified Parties in connection with the defense thereof, except that if the
Indemnifying Party elects not to assume such defense or counsel for the
Indemnified Parties advises that there are issues which raise conflicts of
interest between the Indemnifying Party and the Indemnified Parties, the
Indemnified Parties may retain counsel which is reasonably satisfactory to the
Indemnifying Party, and the Indemnifying Party shall pay, promptly as statements
therefore are received, the reasonable fees and expenses of such counsel for the
Indemnified Parties (which may not exceed one firm in any jurisdiction), (ii)
the Indemnified Parties will cooperate in the defense of any such matter, (iii)
the Indemnifying Party shall not be liable for any settlement effected without
its prior written consent, and (iv) the Indemnifying Party shall have no
obligation hereunder in the event that a federal or state banking agency or a
court of competent jurisdiction shall determine that indemnification of an
Indemnified Party in the manner contemplated hereby is prohibited by applicable
laws and regulations.
(c) Prior to the Effective Time, Farmers shall cause the persons
serving as directors and officers of FSSB and any FSSB Subsidiaries immediately
prior to the Effective Time to be covered by the directors' and officers'
liability insurance policy maintained by FSSB for a period of five years after
the Effective Time (provided that Farmers may substitute therefore policies of
at least the same coverage and amounts containing terms and conditions which are
not materially less advantageous than such policy or single premium tail
coverage with policy limits equal to FSSB's existing coverage limits) with
respect to acts or omissions occurring prior to the Effective Time which were
committed by such directors and officers in their capacities as such.
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(d) If Farmers or any of its successors or assigns shall consolidate
with or merge into any other entity and shall not be the continuing or surviving
entity of such consolidation or merger or shall transfer all or substantially
all of its assets to any other entity, then and in each case, proper provisions
shall be made so that the successors and assigns of Farmers or the surviving
company shall assume the obligations set forth in this Section 7.9 hereof prior
to or simultaneously with the consummation of such transaction.
ARTICLE VIII - REGULATORY AND OTHER MATTERS
8.1. Meetings of Shareholders. FSSB will (i) as promptly as practicable
after the Merger Registration Statement is declared effective by the SEC, take
all steps necessary to duly call, give notice of, convene and hold a meeting of
its shareholders for the purpose of considering this Agreement and the Merger,
and for such other purposes as may be, in FSSB's reasonable judgment, necessary
or desirable (the "FSSB Shareholders Meeting"), (ii) in connection with the
solicitation of proxies with respect to the FSSB Shareholders Meeting, have its
Board of Directors recommend approval of this Agreement to the FSSB Shareholders
unless the Board of Directors shall have determined that such recommendation
would violate its fiduciary duties under applicable law; and (iii) cooperate and
consult with Farmers with respect to each of the foregoing matters.
8.2. Proxy Statement--Prospectus; Merger Registration Statement.
(a) For the purposes (x) of registering IBT Common Stock to be offered
to holders of FSSB Common Stock in connection with the Merger with the SEC under
the Securities Act and (y) of holding the FSSB Shareholders Meeting, Farmers and
the Farmers Entities shall draft and prepare, and FSSB shall cooperate in the
preparation of, the Merger Registration Statement, including a proxy statement
and prospectus satisfying all applicable requirements of applicable state
securities and banking laws, and of the Securities Act and the Exchange Act, and
the rules and regulations thereunder (such proxy statement/prospectus in the
form mailed by FSSB to the FSSB shareholders, together with any and all
amendments or supplements thereto, being herein referred to as the "Proxy
Statement-Prospectus"). Farmers and the Farmers Entities shall provide FSSB and
its counsel with appropriate opportunity to review and comment on the Proxy
Statement-Prospectus prior to the time it is initially filed with the SEC or any
amendments are filed with the SEC. Farmers shall cause IBT to file the Merger
Registration Statement, including the Proxy Statement-Prospectus, with the SEC.
Each of Farmers and the Farmers Entities and FSSB shall use their best efforts
to have the Merger Registration Statement declared effective under the
Securities Act as promptly as practicable after such filing, and FSSB shall
thereafter promptly mail the Proxy Statement-Prospectus to its shareholders.
Farmers and the Farmers Entities shall also use its best efforts to obtain all
necessary state securities law or "Blue Sky" permits and approvals required to
carry out the transactions contemplated by this Agreement, and FSSB shall
furnish all information concerning FSSB and the holders of FSSB Common Stock as
may be reasonably requested in connection with any such action.
(b) Each party acknowledges that time is of the essence in connection
with the preparation and filing of the Merger Registration Statement. Farmers
shall cause IBT to advise
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FSSB promptly after IBT receives notice of the time when the Merger Registration
Statement has become effective or any supplement or amendment has been filed, of
the issuance of any stop order or the suspension of the qualifications of the
shares of IBT Common Stock issuable pursuant to the Merger Registration
Statement, or the initiation or threat of any proceeding for any such purpose,
or of any request by the SEC for the amendment or supplement of the Merger
Registration Statement, or for additional information, and Farmers shall cause
IBT to provide FSSB with as many copies of such Merger Registration Statement
and all amendments thereto promptly upon the filing thereof as FSSB may
reasonably request.
(c) FSSB and Farmers and the Farmers Entities shall promptly notify
the other party if at any time it becomes aware that the Proxy
Statement-Prospectus or the Merger Registration Statement contains any untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements contained therein, in light
of the circumstances under which they were made, not misleading. In such event,
FSSB shall cooperate with IBT in the preparation of a supplement or amendment to
such Proxy Statement-Prospectus that corrects such misstatement or omission, and
Farmers shall cause IBT to file an amended Merger Registration Statement with
the SEC, and each of FSSB and Farmers and the Farmers Entities shall mail an
amended Proxy Statement-Prospectus to FSSB's shareholders.
8.3. Regulatory Approvals. Each of FSSB and Farmers and the Farmers
Entities will cooperate with the other and use all reasonable efforts to
promptly prepare and, within 30 days after the date hereof or as soon thereafter
as practicable, file all necessary documentation to obtain all necessary
permits, consents, waivers, approvals and authorizations of the FRB, FDIC and
the Bureau and any other third parties and governmental bodies necessary to
consummate the transactions contemplated by this Agreement. FSSB and Farmers and
the Farmers Entities shall furnish each other and each other's counsel with all
information concerning themselves, their Subsidiaries, directors, officers and
shareholders and such other matters as may be necessary or advisable in
connection with any application, petition or other statement made by or on
behalf of FSSB or Farmers and the Farmers Entities to any Bank Regulator or
governmental body in connection with the Merger and the other transactions
contemplated by this Agreement. Each party acknowledges that time is of the
essence in connection with the preparation and filing of the documentation
referred to above. FSSB shall have the right to review in advance all
characterizations of the information relating to FSSB and any of its
Subsidiaries which appear in any filing made in connection with the transactions
contemplated by this Agreement with any governmental body.
8.4. Affiliates. FSSB shall use all reasonable efforts to cause each
director, executive officer and other person who is an "affiliate" (for purposes
of Rule 145 under the Securities Act) of FSSB to deliver to Farmers, as soon as
practicable after the date of this Agreement, and at least thirty (30) days
prior to the date of the FSSB Shareholders Meeting, a written agreement, in the
form of Exhibit B hereto, providing that such person will not sell, pledge,
transfer or otherwise dispose of any shares of IBT Common Stock to be received
by such "affiliate" as a result of the Merger otherwise than in compliance with
the applicable provisions of the Securities Act and the rules and regulations
thereunder.
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8.5. Employment Agreements. As of the Closing Date, Surviving Corporation
shall: (i) enter into a two year employment agreement with FSSB's President in
the form attached hereto as Exhibit C; and (ii) enter into employment agreements
with FSSB's then current employees in the form attached hereto as Exhibit G.
8.6. Post-Closing Operations. At and after the Closing Date, Farmers and
FSSB agree that:
(a) Surviving Corporation shall be a state of Michigan chartered
commercial bank.
(b) All banking offices of FSSB will remain open.
(c) There will be no layoffs at FSSB as a result of the Merger.
(d) The deferred compensation plan for directors of FSSB shall be
continued.
(e) The executive supplemental income plan for officers of FSSB shall
be continued.
ARTICLE IX - CLOSING CONDITIONS
9.1. Conditions to Each Party's Obligations Under This Agreement. The
respective obligations of each party under this Agreement shall be subject to
the fulfillment at or prior to the Closing Date of the following conditions,
none of which may be waived:
(a) Shareholder Approval. This Agreement and the transactions
contemplated hereby shall have been approved by the requisite vote of the
shareholders of FSSB.
(b) Injunctions. None of the parties hereto shall be subject to any
order, decree or injunction of a court or agency of competent jurisdiction, and
no statute, rule or regulation shall have been enacted, entered, promulgated,
interpreted, applied or enforced by any Governmental Entity or Bank Regulator,
that enjoins or prohibits the consummation of the transactions contemplated by
this Agreement.
(c) Regulatory Approvals. All required Regulatory Approvals shall have
been obtained and shall remain in full force and effect and all waiting periods
relating thereto shall have expired; and no such Regulatory Approval shall
include any condition or requirement, excluding standard conditions that are
normally imposed by the regulatory authorities in bank merger transactions, that
would, in the good faith reasonable judgment of the Board of Directors of
Farmers, materially and adversely affect the business, operations, financial
condition, property or assets of the combined enterprise of FSSB and Farmers or
otherwise materially impair the value of FSSB to Farmers and the Farmers
Entities.
(d) Effectiveness of Merger Registration Statement. The Merger
Registration Statement shall have become effective under the Securities Act and
no stop order suspending the
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effectiveness of the Merger Registration Statement shall have been issued, and
no proceedings for that purpose shall have been initiated or threatened by the
SEC and, if the offer and sale of IBT Common Stock in the Merger is subject to
the blue sky laws of any state, shall not be subject to a stop order of any
state securities commissioner.
(e) Fairness Opinion. FSSB and Farmers shall have received an opinion
from Austin Associates, LLC, reasonably acceptable to them, dated as of the date
of this Agreement and renewed as of a date approximately the date of the Proxy
Statement-Prospectus to the effect that the terms of the Merger are fair to
FSSB's shareholders and IBT's shareholders from a financial point of view as of
that date and such opinion shall not have been subsequently withdrawn.
(f) Federal Tax Opinion. FSSB and Farmers shall have received an
opinion of Foster, Swift, Collins & Smith, P.C. counsel to Farmers and IBT
("Farmers' Counsel"), in form and substance reasonably satisfactory to both FSSB
and Farmers, substantially to the effect that, on the basis of facts,
representations and assumptions set forth in such opinion which are consistent
with the state of facts existing at the Effective Time, the Merger will be
treated as a reorganization within the meaning of Section 368(a) of the Code. In
rendering such opinion, Farmers' Counsel may require and rely upon
representations and covenants, including those contained in certificates of
officers of FSSB, Farmers, IBT, and others reasonably satisfactory to such
counsel.
(g) No Burdensome Condition. None of the Regulatory Approvals shall
impose any term, condition or restriction upon FSSB, Farmers or any of their
respective Affiliates that FSSB or Farmers, in good faith, reasonably determines
would so materially adversely affect the economic or business benefits of the
transactions contemplated by this Agreement to FSSB or Farmers as to render
inadvisable in the reasonable good faith judgment of FSSB or Farmers, the
consummation of the Merger.
9.2. Conditions to the Obligations of Farmers under this Agreement. The
obligations of Farmers under this Agreement shall be further subject to the
satisfaction of the conditions set forth in Sections 9.2(a) through 9.2(e) at or
prior to the Closing Date, which shall be waiveable by Farmers:
(a) Representations and Warranties. Each of the representations and
warranties of FSSB set forth in this Agreement shall be true and correct as of
the date of this Agreement and upon the Closing Date with the same effect as
though all such representations and warranties had been made at the Closing Date
(except to the extent such representations and warranties speak as of an earlier
date); and FSSB shall have delivered to Farmers a certificate to such effect
signed by the Chief Executive Officer and the Chief Financial Officer of FSSB as
of the Closing.
(b) Agreements and Covenants. FSSB shall have performed in all
material respects all obligations and complied in all material respects with all
agreements or covenants to be performed or complied with by it at or prior to
the Effective Time, and Farmers shall have
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received a certificate signed on behalf of FSSB by the Chief Executive Officer
and Chief Financial Officer of FSSB to such effect dated as of the Effective
Time.
(c) Permits, Authorizations, Etc. FSSB and the FSSB Subsidiaries shall
have obtained any and all material permits, authorizations, consents, waivers,
clearances or approvals required to be obtained by it for the lawful
consummation of the Merger.
(d) Dissenters' Rights. The holders of no more than 10% of the FSSB
Common Stock shall have indicated their intention to seek dissenters' rights of
appraisal.
(e) Legal Opinion. Farmers shall have received the opinion of Bodman
LLP, counsel to FSSB, dated the Closing Date, in substantially the form shown on
Exhibit D.
FSSB will furnish Farmers with such certificates of its officers or others
and such other documents to evidence fulfillment of the conditions set forth in
this Section 9.2 as Farmers may reasonably request.
9.3. Conditions to the Obligations of FSSB under this Agreement. The
obligations of FSSB under this Agreement shall be further subject to the
satisfaction of the conditions set forth in Sections 9.3(a) through 9.3(f) at or
prior to the Closing Date, which shall be waiveable by FSSB:
(a) Representations and Warranties. Each of the representations and
warranties of Farmers and IBT set forth in this Agreement shall be true and
correct as of the date of this Agreement and upon the Closing Date with the same
effect as though all such representations and warranties had been made at the
Closing Date (except to the extent such representations and warranties speak as
of an earlier date); and Farmers shall have delivered to FSSB a certificate to
such effect signed by the Chief Executive Officer and the Chief Financial
Officer of Farmers and IBT as of the Closing.
(b) Agreements and Covenants. Farmers and IBT shall have performed in
all material respects all obligations and complied in all material respects with
all agreements or covenants to be performed or complied with by it at or prior
to the Effective Time, and FSSB shall have received a certificate signed on
behalf of Farmers by the Chief Executive Officer and Chief Financial Officer of
Farmers and IBT to such effect dated as of the Effective Time.
(c) Permits, Authorizations, Etc. Farmers and the Farmers Entities
shall have obtained any and all material permits, authorizations, consents,
waivers, clearances or approvals required to be obtained by it for the lawful
consummation of the Merger.
(d) Payment of Merger Consideration. IBT shall have delivered the
Exchange Fund to the Exchange Agent on or before the Closing Date.
(e) Legal Opinion. FSSB shall have received the opinion of Foster,
Swift, Collins & Smith, P.C., counsel to Farmers and IBT, dated the Closing
Date, in substantially the form shown on Exhibit E.
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(f) Fairness Opinion. FSSB shall have received an opinion from
Donnelly Penman and Partners, dated as of the date approximately the date of the
Proxy Statement-Prospectus to the effect that the terms of the Merger are fair
to FSSB's shareholders from a financial point of view as of that date and such
opinion shall not have been subsequently withdrawn.
Farmers will furnish FSSB with such certificates of its officers or others and
such other documents to evidence fulfillment of the conditions set forth in this
Section 9.3 as FSSB may reasonably request.
ARTICLE X - THE CLOSING
10.1. Time and Place. Subject to the provisions of Articles IX and XI
hereof, the Closing of the transactions contemplated hereby shall take place at
the offices of IBT, 200 East Broadway, Mt. Pleasant, Michigan, at 10 a.m., or at
such other place or time upon which Farmers and FSSB mutually agree.
10.2. Deliveries at the Closing. At Closing there shall be delivered to
Farmers and FSSB the certificates and other documents and instruments required
to be delivered at the Closing under Article IX hereof. At or prior to the
Closing, Farmers shall deliver the Merger Consideration as set forth under
Section 9.3(d) hereof.
ARTICLE XI - TERMINATION, AMENDMENT AND WAIVER
11.1. Termination. This Agreement may be terminated at any time prior to
the Closing Date, whether before or after approval of the Merger by the
shareholders of FSSB:
(a) At any time by the mutual written agreement of Farmers and FSSB;
(b) By Farmers or FSSB (provided, that the terminating party is not
then in material breach of any representation, warranty, covenant or other
agreement contained herein) if there shall have been a material breach of any of
the representations or warranties set forth in this Agreement on the part of the
other party, which breach by its nature cannot be cured prior to the Termination
Date or shall not have been cured within 30 days after written notice of such
breach by the terminating party to the other party;
(c) By Farmers or FSSB (provided, that the terminating party is not
then in material breach of any representation, warranty, covenant or other
agreement contained herein) if there shall have been a material failure to
perform or comply with any of the covenants or agreements set forth in this
Agreement on the part of the other party, which failure by its nature cannot be
cured prior to the Termination Date or shall not have been cured within 30 days
after written notice of such failure by the terminating party to the other
party;
(d) By Farmers or FSSB, if the Closing shall not have occurred by the
Termination Date, or such later date as shall have been agreed to in writing by
Farmers and FSSB; provided, that no party may terminate this Agreement pursuant
to this Section 11.1(d) if the failure of the Closing to have occurred on or
before said date was due to such party's material
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breach of any representation, warranty, covenant or other agreement contained in
this Agreement;
(e) By Farmers or FSSB, if the shareholders of FSSB shall have voted
at the FSSB Shareholders Meeting on the transactions contemplated by this
Agreement and such vote shall not have been sufficient to approve such
transactions;
(f) By Farmers or FSSB, if (i) final action has been taken by a Bank
Regulator whose approval is required in connection with this Agreement and the
transactions contemplated hereby, which final action (x) has become unappealable
and (y) does not approve this Agreement or the transactions contemplated hereby,
(ii) any Bank Regulator whose approval or non-objection is required in
connection with this Agreement and the transactions contemplated hereby has
stated in writing that it will not issue the required approval or nonobjection,
or (iii) any court of competent jurisdiction or other governmental authority
shall have issued an order, decree, ruling or taken any other action
restraining, enjoining or otherwise prohibiting the Merger and such order,
decree, ruling or other action shall have become final and unappealable;
(g) By the Board of Directors of either party (provided, that the
terminating party is not then in material breach of any representation,
warranty, covenant or other agreement contained herein) in the event that any of
the conditions precedent to the obligations of such party to consummate the
Merger cannot be satisfied or fulfilled by the date specified in Section 11.1(d)
of this Agreement;
(h) By the Board of Directors of Farmers if FSSB has received a
Superior Proposal and the Board of Directors of FSSB has entered into an
acquisition agreement with respect to the Superior Proposal, terminated this
Agreement, withdrawn its recommendation of this Agreement, has failed to make
such recommendation or has modified or qualified its recommendation in a manner
adverse to Farmers;
(i) By the Board of Directors of FSSB if FSSB has received a Superior
Proposal and the Board of Directors of FSSB has made a determination to accept
such Superior Proposal; provided that FSSB shall not terminate this Agreement
pursuant to this Section 11.1(i) and enter into a definitive agreement with
respect to the Superior Proposal until the expiration of five (5) business days
following Farmers' receipt of written notice advising Farmers that FSSB has
received a Superior Proposal, specifying the material terms and conditions of
such Superior Proposal (and including a copy thereof with all accompanying
documentation, if in writing) identifying the person making the Superior
Proposal and stating whether FSSB intends to enter into a definitive agreement
with respect to the Superior Proposal. After providing such notice, FSSB shall
provide a reasonable opportunity to Farmers during the five business-day period
to make such adjustments in the terms and conditions of this Agreement as would
enable FSSB to proceed with the Merger on such adjusted terms.
11.2. Effect of Termination.
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(a) In the event of termination of this Agreement pursuant to any
provision of Section 11.1, this Agreement shall forthwith become void and have
no further force, except that (i) the provisions of Sections 11.2, 12.1, 12.2,
12.6, 12.9, 12.10, and any other Section which, by its terms, relates to
post-termination rights or obligations, shall survive such termination of this
Agreement and remain in full force and effect.
(b) If this Agreement is terminated, expenses and damages of the
parties hereto shall be determined as follows:
(i) Except as provided below, whether or not the Merger is
consummated, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated by this Agreement shall be paid by the party
incurring such expenses; provided, however, if the Merger is not consummated due
to the failure to obtain any necessary Regulatory Approval, Farmers shall
reimburse FSSB for its actual costs and expenses incurred by FSSB after March 9,
2006 in connection with this Agreement and the transactions contemplated by this
Agreement including, without limitation, fees and expenses of its attorneys,
accountants and financial advisors.
(ii) In the event of a termination of this Agreement because of a
willful breach of any representation, warranty, covenant or agreement contained
in this Agreement, the breaching party shall remain liable for any and all
damages, costs and expenses, including all reasonable attorneys' fees, sustained
or incurred by the non-breaching party as a result thereof or in connection
therewith or with respect to the enforcement of its rights hereunder.
11.3. Amendment, Extension and Waiver. Subject to applicable law, at any
time prior to the Effective Time (whether before or after approval thereof by
the shareholders of FSSB), the parties hereto by action of their respective
Boards of Directors, may (a) amend this Agreement, (b) extend the time for the
performance of any of the obligations or other acts of any other party hereto,
(c) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto, or (d) waive compliance
with any of the agreements or conditions contained herein; provided, however,
that after any approval of this Agreement and the transactions contemplated
hereby by the shareholders of FSSB, there may not be, without further approval
of such shareholders, any amendment of this Agreement which reduces the amount
or value, or changes the form of, the Merger Consideration to be delivered to
FSSB's shareholders pursuant to this Agreement. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto. Any agreement on the part of a party hereto to any extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party, but such waiver or failure to insist on strict compliance
with such obligation, covenant, agreement or condition shall not operate as a
waiver of, or estoppel with respect to, any subsequent or other failure. Any
termination of this Agreement pursuant to Article XI may only be effected upon a
vote of a majority of the entire Board of Directors of the terminating party.
ARTICLE XII - MISCELLANEOUS
12.1. Confidentiality. Except as provided below, Farmers and FSSB each
agree:
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(a) Treatment; Restricted Access. All information furnished to the
other party or its Affiliates pursuant to this Agreement shall be treated as
strictly confidential and shall not be disclosed to any other person, natural or
corporate, except for its employees, attorneys, accountants, regulators, and
financial advisers who are reasonably believed to have a need for such
information in connection with the Merger.
(b) No Other Use. No party shall make any use, other than related to
the Merger, of any information it may come to know as a direct result of a
disclosure by the other party, its subsidiaries, directors, officers, employees,
attorneys, accountants, or advisers or that may come into its possession from
any other confidential source during the course of its investigation.
(c) Excepted Information. The provisions of this section shall not
preclude the parties or their respective subsidiaries, from using or disclosing
information that is readily ascertainable from public information or trade
sources, known by it before the commencement of discussions between the parties
or subsequently developed by it or its subsidiaries independent of any
investigation under this Agreement, received from any other person who is not
Affiliates with a party and who is not under any obligation to keep such
information confidential, or reasonably required to be included in any filing or
application required by any governmental or regulatory agency.
(d) Prohibit Insider Trading. The parties shall each take reasonable
steps to assure that any person who receives nonpublic information concerning
the Merger or the other party will treat the information confidentially as
provided in this section and not directly or indirectly buy or sell, or advise
or encourage other persons to buy or sell, FSSB Common Stock or IBT Common Stock
until such information is properly disclosed to the public.
12.2. Public Announcements. FSSB and Farmers shall cooperate with each
other in the development and distribution of all news releases and other public
disclosures with respect to this Agreement, and except as may be otherwise
required by law, neither FSSB nor Farmers shall issue any news release, or other
public announcement or communication with respect to this Agreement unless such
news release or other public announcement or communication has been mutually
agreed upon by the parties hereto.
12.3. Survival. All representations, warranties and covenants in this
Agreement or in any instrument delivered pursuant hereto shall expire and be
terminated and extinguished at the Effective Time, except for those covenants
and agreements contained herein which by their terms apply in whole or in part
after the Effective Time.
12.4. Notices. All notices or other communications hereunder shall be in
writing and shall be deemed given if delivered by receipted hand delivery or
mailed by prepaid registered or certified mail (return receipt requested) or by
recognized overnight courier addressed as follows:
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If to FSSB, to: Thomas Kedrowski
The Farwell State Savings Bank
399 West Main Street
Farwell, MI 48622
With required copies to: Bodman LLP
Attn: David W. Barton
229 Court Street
Cheboygan, Michigan 49721
If to Farmers, to: Dennis P. Angner
Chief Executive Officer and President
IBT Bancorp, Inc.
200 East Broadway
Mt. Pleasant, MI 48858
With required copies to: Foster, Swift, Collins & Smith, P.C.
c/o Matt G. Hrebec, Esq.
313 South Washington Square
Lansing, MI 48933
or such other address as shall be furnished in writing by any party, and any
such notice or communication shall be deemed to have been given: (a) as of the
date delivered by hand; (b) three (3) business days after being delivered to the
U.S. mail, postage prepaid; or (c) one (1) business day after being delivered to
the overnight courier.
12.5. Parties in Interest. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
assigns; provided, however, that neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any party hereto without
the prior written consent of the other party, and that (except as provided in
Article III of this Agreement) nothing in this Agreement is intended to confer
upon any other person any rights or remedies under or by reason of this
Agreement.
12.6. Complete Agreement. This Agreement, including the Exhibits and
Disclosure Schedules hereto and the documents and other writings referred to
herein or therein or delivered pursuant hereto, and the Confidentiality
Agreements referred to in Section 12.1, contains the entire agreement and
understanding of the parties with respect to its subject matter. There are no
restrictions, agreements, promises, warranties, covenants or undertakings
between the parties other than those expressly set forth herein or therein. This
Agreement supersedes all prior agreements and understandings (other than the
Confidentiality Agreements referred to in Section 12.1 hereof) between the
parties, both written and oral, with respect to its subject matter.
12.7. Counterparts. This Agreement may be executed in one or more
counterparts all of which shall be considered one and the same agreement and
each of which shall be deemed an original.
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12.8. Severability. In the event that any one or more provisions of this
Agreement shall for any reason be held invalid, illegal or unenforceable in any
respect, by any court of competent jurisdiction, such invalidity, illegality or
unenforceability shall not affect any other provisions of this Agreement and the
parties shall use their reasonable efforts to substitute a valid, legal and
enforceable provision which, insofar as practical, implements the purposes and
intents of this Agreement.
12.9. Governing Law. This Agreement shall be governed by the laws of
Michigan, without giving effect to its principles of conflicts of laws.
12.10. Interpretation. When a reference is made in this Agreement to
sections or exhibits, such reference shall be to a section of or exhibit to this
Agreement unless otherwise indicated. The recitals hereto constitute an integral
part of this Agreement. References to sections include subsections, which are
part of the related section. The table of contents, index and headings contained
in this Agreement are for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement. Whenever the words
"include", "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation". The phrases "the date
of this Agreement", "the date hereof" and terms of similar import, unless the
context otherwise requires, shall be deemed to refer to the date set forth in
the Recitals to this Agreement.
12.11. Specific Performance. The parties hereto agree that irreparable
damage would occur in the event that the provisions contained in this Agreement
were not performed in accordance with its specific terms or were otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions thereof in any court of the United States
or any state having jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity.
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IN WITNESS WHEREOF, Farmers, FSSB and IBT have caused this Agreement to be
executed by their duly authorized officers as of the date first set forth above.
Farmers State Bank of Breckenridge
Dated: May 2, 2006 By: /s/ Timothy M. Miller
------------------------------------
Timothy M. Miller
President and CEO
The Farwell State Savings Bank
Dated: April 28, 2006 By: /s/ Herbert R. Miller
------------------------------------
Herbert R. Miller
Chairman of the Board
IBT Bancorp, Inc.
Dated: May 2, 2006 By: /s/ Dennis P. Angner
------------------------------------
Dennis P. Angner
President and CEO
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APPENDIX B
DRAFT
THE FINAL OPINION LETTER SHALL BE PLACED ON
AUSTIN ASSOCIATES, LLC LETTERHEAD
July __, 2006
Board of Directors
IBT Bancorp, Inc.
200 East Broadway
Mount Pleasant, MI 48858
and
Board of Directors
The Farwell State Savings Bank
399 West Main Street
Farwell, MI 48622
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to IBT Bancorp, Inc. ("IBT") and The Farwell State Savings Bank
("Farwell") and their respective shareholders of the terms of the Amended and
Restated Agreement and Plan of Merger dated as of April 28, 2006 ("Agreement")
between IBT, Farwell, and Farmers State Bank of Breckenridge ("Farmers").
Farmers is a wholly-owned subsidiary of IBT. The terms of the Agreement provide
for the merger of Farwell with and into Farmers. At the effective time of the
merger, Farmers will change its name to FSB Bank.
The terms of the Agreement provide for each outstanding share of Farwell common
stock to be exchanged for 3.0382 shares of IBT common stock plus $29.00 in cash.
IBT will not issue fractional shares in connection with the merger; instead,
fractional shares shall be settled in cash.
In carrying out our engagement, we have reviewed and analyzed material bearing
upon the financial and operating condition of IBT and Farwell, including but not
limited to the following: (i) the Agreement; (ii) the financial statements of
IBT and Farwell for the period 2001 through year-to-date March 31, 2006; (iii)
certain other publicly available information regarding IBT and Farwell; (iv)
publicly available information regarding the performance of certain other
companies whose business activities were believed by Austin Associates to be
generally comparable to those of IBT and Farwell; (v) the financial terms, to
the extent publicly available, of certain comparable transactions; and (vi) such
other analysis and information as we deemed relevant.
In our review and analysis, we relied upon and assumed the accuracy and
completeness of the financial and other information provided to us or publicly
available, and have not attempted to verify the same. We have made no
independent verification as to the status of individual loans made by IBT or
Farwell, and have instead relied upon representations and information concerning
loans of IBT and Farwell in the aggregate.
In addition, we have assumed in the course of obtaining the necessary approvals
for the transaction, no condition will be imposed that will have a material
adverse effect on the contemplated benefits of the transaction to IBT or Farwell
and their respective shareholders.
This opinion is based on economic and market conditions and other circumstances
existing on, and information made available as of, the date hereof. This opinion
is limited to the fairness of the financial terms of the Agreement to IBT and
Farwell and their respective shareholders, and does not address the underlying
business decision by the Boards of Directors to pursue the merger.
Austin Associates will receive a contingent fee based on consummation of the
transaction. In addition, IBT and Farwell have agreed to indemnify Austin
Associates against certain liabilities.
B-1
Page 2
Members of the Board
July _____, 2006
Based upon our analysis and subject to the qualifications described herein, we
believe that as of the date of this letter the terms of the Agreement are fair,
from a financial point of view, to IBT and Farwell and their respective
shareholders.
Austin Associates, LLC
B-2
APPENDIX C
June 30, 2006
Board of Directors
The Farwell State Savings Bank
399 W. Main St.
Farwell, Michigan 48622-0099
Members of the Board of Directors:
You have requested our opinion as to the fairness, from a financial point of
view, to the shareholders of Farwell State Savings Bank ("Farwell") of the
exchange ratio and cash consideration provided for pursuant to the Agreement of
Agreement and Plan of Merger, dated as of December 22, 2005 to which IBT
Bancorp, Inc. ("IBT") will acquire Farwell. On May 2, 2006 IBT, Farmers State
Bank of Breckenridge ("Farmers") and Farwell entered into an amended and
restated Agreement and Plan of Merger (the "Amended Agreement") to substitute
Farmers as the acquiring entity. In accordance with the terms of the Amended
Agreement, Farwell will merge with Farmers as the surviving entity.
Concurrently, each share of Farwell common stock issued and outstanding
immediately prior to the effective time of the merger shall be converted into
the right to receive 3.0382 shares of IBT common stock plus $29.00 in cash.
Donnelly Penman & Partners ("Donnelly Penman") is an investment-banking firm of
recognized standing. As part of our investment banking services, we are
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, private placements and valuations for
stock plans, corporate and other purposes. We are acting as financial advisor to
Farwell in connection with the Merger and will receive a fee from Farwell for
our services pursuant to the terms of our engagement letter with Farwell, dated
as of January 18, 2006 (the "Engagement Letter").
In arriving at its opinion, Donnelly Penman engaged in discussions with members
of the management teams of each of Farwell and IBT concerning the historical and
current business operations, financial conditions and prospects of Farwell and
IBT and reviewed:
o the Agreement and Plan of Merger dated December 22, 2005 and
the Amended and Restated Agreement and Plan of Merger dated
May 2, 2006;
o the most recent draft dated June 29, 2006 of the Form S-4
Registration Statement relating to the merger;
o certain publicly-available information for IBT, including each
of the Annual Reports to Stockholders and Annual Reports on
Form 10-K for the years ended December 31, 2003, 2004 and 2005
and the quarterly reports on Form 10-Q for the quarter ended
March 31, 2006;
o certain information, including financial forecasts, relating
to earnings, assets, liabilities and prospects of IBT
furnished by senior management of IBT;
C-1
The Board of Directors
Farwell State Savings Bank
June 30, 2006
Page 2 of 3
o Independent Auditor's Report for Farwell State Bank for the
years ended December 31, 2005 and 2004 and the unaudited
condensed balance sheet and statement of income for the three
months ended March 31, 2006 and March 31, 2005;
o certain information, including financial forecasts, relating
to earnings, assets, liabilities and prospects of Farwell
furnished by senior management of Farwell;
o IBT's senior management projected earnings estimates for
fiscal years 2006 through 2010, which were deemed reasonable
by IBT management;
o Farwell's senior management projected earnings estimates for
fiscal years 2006 through 2010, which were deemed reasonable
by Farwell management;
o the amount and timing of the cost savings expected to result
from the merger furnished by senior management of IBT;
o the financial condition and operating results of IBT and
Farwell compared to the financial conditions and operating
results of certain other financial institutions that Donnelly
Penman deemed comparable;
o various valuation analyses of Farwell and IBT Donnelly Penman
performed including dividend discount analyses, analysis of
comparable transactions and analysis of comparable companies;
and
o such other information, financial studies, analyses and
investigations and such other factors that Donnelly Penman
deemed relevant for the purposes of its opinion.
In conducting its review and arriving at its opinion, as contemplated under the
terms of its engagement by Farwell, Donnelly Penman, with the consent of IBT and
Farwell, relied, without independent investigation, upon the accuracy and
completeness of all financial and other information provided to it by IBT and
Farwell or upon publicly-available information. Donnelly Penman did not
undertake any responsibility for the accuracy, completeness or reasonableness
of, or any obligation independently to verify, such information. Donnelly Penman
further relied upon the assurance of management of IBT and Farwell that they
were unaware of any facts that would make the information provided or available
to Donnelly Penman incomplete or misleading in any respect. Donnelly Penman did
not make any independent evaluations, valuations or appraisals of the assets or
liabilities of IBT or Farwell. Donnelly Penman did not review any individual
credit files of IBT or Farwell and assumed that the aggregate allowances for
credit losses for IBT and Farwell were adequate to cover such losses. Donnelly
Penman's opinion was necessarily based upon economic and market conditions and
other circumstances as they existed and evaluated by Donnelly Penman on the date
of its opinion. Donnelly Penman does not have any obligation to update its
opinion, unless requested by Farwell in writing to do so, and Donnelly Penman
expressly disclaims any responsibility to do so in the absence of any written
request by Farwell.
C-2
The Board of Directors
Farwell State Savings Bank
June 30, 2006
Page 3 of 3
No limitations were imposed by Farwell on Donnelly Penman on the scope of
Donnelly Penman's investigation or the procedures to be followed by Donnelly
Penman in rendering this opinion. The form and amount of the consideration to be
paid to Farwell or its shareholders were determined through arms length
negotiations between Farwell and IBT.
In our analyses, we have made numerous assumptions with respect to industry
performance, business and economic conditions, and other matters, many of which
are beyond the control of Farwell. Any estimates contained in our analyses are
not necessarily indicative of future results or value, which may be
significantly more or less favorable than such estimates. Estimates of values of
companies do not purport to be appraisals or to necessarily reflect the prices
at which companies or their securities actually may be sold. No company or
merger utilized in our analyses was identical to Farwell, IBT or the Merger.
Accordingly, such analyses are not based solely on arithmetic calculations;
rather, they involve complex considerations and judgments concerning differences
in financial and operating characteristics of the relevant companies, the timing
of the relevant mergers and prospective buyer interests, as well as other
factors that could affect the public trading markets of Farwell or companies to
which it is being compared. None of the analyses performed by us was assigned a
greater significance than any other.
We hereby consent to the reference to our opinion in the prospectus and proxy
statement to be issued pursuant to the Amended Agreement and to the inclusion of
the foregoing opinion in the prospectus and proxy statement relating to the
meeting of stockholders of Farwell. In giving such consent, we do not thereby
admit that we come within the category of persons whose consent is required
under Section 7 of the Securities Act of 1933 or the rules and regulations of
the Securities and Exchange Commission thereunder. Further, we express no view
as to the price or trading range for shares of the common stock of IBT following
the consummation of the Merger.
Based upon and subject to the foregoing, including the various assumptions and
limitations set forth herein, it is our opinion that, as of June 30, 2006, the
exchange ratio and cash consideration to be received by Farwell shareholders
under the Amended Agreement is fair, from a financial point of view, to the
shareholders of Farwell.
Very truly yours,
Donnelly Penman & Partners
C-3
APPENDIX D
Section 3706(2)(b) of the Michigan Banking Code of 1999
A shareholder of the existing bank, existing savings bank, or existing
association who votes against the consolidation, or who has given notice in
writing to that bank or association at or before the meeting called for the
purpose of considering the agreement of consolidation that the shareholder
dissents from the consolidation, is entitled to receive in cash from the
consolidated organization the fair value of all shares held by the shareholder,
if and when the consolidation is consummated, upon written request made to the
consolidated organization at any time within 30 days after the date of
consummation of the consolidation, accompanied by the surrender of the stock
voted in dissent by the shareholder. Upon the filing of the written request and
the surrender of stock certificates, if any, the shareholder shall cease to have
any of the rights of a shareholder except the right to be paid the fair value of
the shareholder's shares. The request having been made shall not be withdrawn
except with the written consent of the consolidated organization. The fair value
of the shares shall be determined, as of the date on which the meeting of
shareholders of the existing bank, existing savings bank, or existing
association was held adopting the agreement of consolidation, by a qualified and
independent appraiser selected by the commissioner upon written request
submitted by a dissenting shareholder entitled to receive the fair value of his
or her shares. The appraiser selected shall file a written appraisal with the
commissioner, who in turn shall forward copies to all interested parties. The
valuation determined by the appraiser is final and binding on all parties as to
the fair value of the shares. The consolidated organization shall pay to each
dissenting shareholder entitled the fair value of his or her shares within 30
days following the receipt of the written appraisal. The fees and expenses of
the appraisal, which shall be approved by the commissioner, shall be paid by the
consolidated organization. The agreement of consolidation shall provide the
manner of disposing of the shares of the existing bank, existing savings bank,
or existing association surrendered by the dissenting shareholders.
D-1
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Articles of Incorporation of IBT provide that its directors and officers are
to be indemnified as of right to the fullest extent permitted under the Michigan
Business Corporation Act. Under the Michigan Business Corporation Act,
directors, officers, employees or agents are entitled to indemnification against
expenses (including attorneys' fees) whenever they successfully defend legal
proceedings brought against them by reason of the fact that they hold such a
position with the corporation. In addition, with respect to actions not brought
by or in the right of the corporation, indemnification is permitted under the
Michigan Business Corporation Act for expenses (including attorneys' fees),
judgments, fines, penalties and reasonable settlement if it is determined that
the person seeking indemnification acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
corporation or its shareholders and, with respect to criminal proceedings, he or
she had no reasonable cause to believe that his or her conduct was unlawful.
With respect to actions brought by or in the right of the corporation,
indemnification is permitted under the Michigan Business Corporation Act for
expenses (including attorneys' fees) and reasonable settlements, if it is
determined that the person seeking indemnification acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the corporation or its shareholders; provided, indemnification is
not permitted if the person is found liable to the corporation, unless the court
in which the action or suit was brought has determined that indemnification is
fair and reasonable in view of all the circumstances of the case.
In addition to the available indemnification, IBT's Articles of Incorporation,
as amended, limit the personal liability of the members of its Board of
Directors for monetary damages with respect to claims by IBT or its shareholders
resulting from certain negligent acts or omissions.
Under an insurance policy maintained by IBT, the directors and officers of IBT
are insured within the limits and subject to the limitations of the policy,
against certain expenses in connection with the defense of certain claims,
actions, suits or proceedings, and certain liabilities which might be imposed as
a result of such claims, action, suits or proceedings, which may be brought
against them by reason of being or having been such directors and officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
A. Exhibits. The following exhibits are filed as part of this
Registration Statement:
EXHIBIT
NUMBER
-------
2 Amended and Restated Agreement and Plan of Merger dated May 2, 2006,
included as Appendix A to the prospectus and proxy statement included
in this Registration Statement.
3.1 Amended Articles of Incorporation, incorporated by reference to IBT's
Annual Report on Form 10-K, filed with the Securities and Exchange
Commission March 12, 1991.
3.2 Amendment to the Articles of Incorporation, incorporated by reference
to IBT's Annual Report on Form 10-K, filed with the Securities and
Exchange Commission March 26, 1994.
3.3 Amendment to the Articles of Incorporation, incorporated by reference
to IBT's Annual Report on Form 10-K, filed with the Securities and
Exchange Commission March 22, 2000.
3.4 Amendment to the Articles of Incorporation, incorporated by reference
to IBT's Annual Report on Form 10-K, filed with the Securities and
Exchange Commission March 22, 2000.
3.5 Bylaws of IBT incorporated by reference to IBT's Annual Report on Form
10-K, filed with the Securities and Exchange Commission March 16,
2005.
5 Opinion of Foster, Swift, Collins & Smith, P.C. as to the legality of
the shares to be issued (including consent).
8 Opinion of Foster, Swift, Collins & Smith, P.C. as to Tax Matters
(including consent).
21 Subsidiaries of IBT Bancorp, Inc., incorporated by reference to the
Company's Annual Report on Form 10-K, filed with the Securities and
Exchange Commission March 16, 2006.
Part II-1
23.1 Consent of IBT Bancorp, Inc.'s Independent Registered Public
Accounting Firm, Rehmann Robson, P.C.
23.2 Consent of The Farwell State Savings Bank Independent Certified Public
Accountants, Rehmann Robson, P.C.
23.3 Consent of Foster, Swift, Collins & Smith, P.C., included in
Exhibit 5.
23.4 Consent of Austin Associates, LLC.
23.5 Consent of Donnelly Penman & Partners
23.6 Consent of Foster, Swift, Collins & Smith, P.C. regarding its tax
opinion, included in Exhibit 8.
24 Powers of Attorney (included on the signature page on page II-6 of
this Registration Statement on Form S-4).
99.1 Form of Proxy for The Farwell State Savings Bank.
B. Financial Statement Schedules.
All schedules for which provision is made in Regulation S-X of the
Securities and Exchange Commission have been omitted because they either are not
required under the related instructions or the required information has been
included in the financial statements of IBT Bancorp, Inc. or notes thereto.
C. Opinions of Financial Advisor.
The form of opinion of Austin Associates, LLC is included as Appendix B to
the prospectus and proxy statement.
The form of opinion of Donnelly Penman & Partners is included as Appendix C
to the prospectus and proxy statement.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low end or high end
of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20 percent
change in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;"
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove form registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Part II-2
(4) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(5) The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the proxy statement-prospectus, to each person to whom the proxy
statement-prospectus is sent or given, the latest annual report to security
holders that is incorporated by reference in the proxy statement-prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3
under the Securities Exchange Act of 1934.
(6) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(7) The undersigned registrant undertakes that every prospectus: (i) that
is filed pursuant to the paragraph immediately preceding, or (ii) that purports
to meet the requirements of Section 10(a)(3) of the Securities Act of 1933 and
is used in connection with an offering of securities subject to Rule 415, shall
be filed as a part of an amendment to the registration statement and will not be
used until such amendment is effective, and that, for purposes of determining
any liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(8) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant
to Item 4,10(b), 11 or 13 of this form, within one business day of receipt
of such request, and to send the incorporated documents by first class mail
or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration
statement through the date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
Part II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant has
duly cause this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Mt. Pleasant, State of
Michigan, on the 29 day of June, 2006.
IBT BANCORP, INC.
By: /s/ Dennis P. Angner
-------------------------------------
Dennis P. Angner
President and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Dennis P. Angner and Richard J. Barz, and each of
them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to execute in the name of each such person
who is then an officer of the Registrant any and all amendments (including
post-effective amendments) to this Registration Statement and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission granting unto said attorneys-in-fact and
agents and each of them, full power and authority to do so and perform each and
every act and thing required and necessary to be done in and about the premises,
as fully as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the dates indicated.
/s/ Dennis P. Angner Dated: June 29, 2006
-------------------------------------------
Dennis P. Angner, President and
Chief Executive Officer and a
Director (Principal Executive Officer and
Principal Financial and Accounting Officer)
/s/ Richard J. Barz Dated: June 29, 2006
-------------------------------------------
Richard J. Barz, Director
/s/ Sandra L. Caul Dated: June 29, 2006
-------------------------------------------
Sandra L. Caul, Director
Dated: _______, 2006
-------------------------------------------
James C. Fabiano, Director
/s/ David W. Hole Dated: June 29, 2006
-------------------------------------------
David W. Hole, Director
/s/ David J. Maness Dated: June 29, 2006
-------------------------------------------
David J. Maness, Director
/s/ W. Joseph Manifold Dated: June 29, 2006
-------------------------------------------
W. Joseph Manifold, Director
Part II-4
Dated: _______, 2006
-------------------------------------------
Timothy M. Miller, Director
Dated: _______, 2006
-------------------------------------------
Ronald E. Schumacher, Director
/s/ William J. Strickler Dated: June 29, 2006
-------------------------------------------
William J. Strickler, Director
/s/ Dale Weburg Dated: June 29, 2006
-------------------------------------------
Dale Weburg, Director
Part II-5
EXHIBIT INDEX
EXHIBIT
NUMBER
-------
2 Amended and Restated Agreement and Plan of Merger dated May 2, 2006,
included as Appendix A to the prospectus and proxy statement included
in this Registration Statement.
5 Opinion of Foster, Swift, Collins & Smith, P.C. as to the legality of
the shares to be issued (including consent).
8 Opinion of Foster, Swift, Collins & Smith, P.C. as to Tax Matters
(including consent).
23.1 Consent of IBT Bancorp, Inc.'s Independent Registered Public
Accounting Firm, Rehmann Robson, P.C.
23.2 Consent of The Farwell State Savings Bank Independent Certified Public
Accountants, Rehmann Robson, P.C.
23.3 Consent of Foster, Swift, Collins & Smith, P.C., included in
Exhibit 5.
23.4 Consent of Austin Associates, LLC.
23.5 Consent of Donnelly Penman & Partners.
23.6 Consent of Foster, Swift, Collins & Smith, P.C. regarding its tax
opinion, included in Exhibit 8.
24 Powers of Attorney (included on the signature page on page II-6 of
this Registration Statement on Form S-4).
99.1 Form of Proxy for The Farwell State Savings Bank.
Part II-6