Edgar Filing: IBT BANCORP INC /MI/

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )

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IBT BANCORP, INC
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(Name of Registrant as Specified In Its Charter)

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SEC 1913 (02-02)

IBT BANCORP, INC.
200 EAST BROADWAY
MOUNT PLEASANT, MICHIGAN 48858
---------------------

NOTICE OF THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 26, 2005
---------------------

Notice is hereby given that the Annual Meeting of Shareholders of IBT
Bancorp, Inc. will be held on Tuesday, April 26, 2005 at 7:00 p.m. Eastern
Standard Time, at the Holiday Inn, 5665 E. Pickard Street, Mount Pleasant,
Michigan. The meeting is for the purpose of considering and acting upon the
following:

1. The election of four directors.

2. Such other business as may properly come before the meeting, or any
adjournment or adjournments thereof.

The Board of Directors has fixed March 1, 2005 as the record date for
determination of shareholders entitled to notice of, and to vote at, the meeting
or any adjournments thereof.

Your vote is important. Even if you plan to attend the meeting, please date
and sign the enclosed proxy form, indicate your choice with respect to the
matters to be voted upon, and return it promptly in the enclosed envelope. Note
that if stock is held in more than one name, all parties should sign the proxy
form.

By order of the Board of Directors

/s/ Mary Ann Breuer

Mary Ann Breuer, Secretary

Dated: April 4, 2005

IBT BANCORP, INC.
200 EAST BROADWAY
MOUNT PLEASANT, MICHIGAN 48858
---------------------

PROXY STATEMENT
---------------------
GENERAL INFORMATION

This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of IBT Bancorp, Inc. (the Corporation) a
Michigan financial holding company, to be voted at the Annual Meeting of
Shareholders of the Corporation to be held on Tuesday, April 26, 2005 at 7:00
p.m. at the Holiday Inn, 5665 E. Pickard Street, Mount Pleasant, Michigan, or at
any adjournment or adjournments thereof, for the purposes set forth in the
accompanying Notice of Annual Meeting of Shareholders and in this Proxy
Statement.

This Proxy Statement has been mailed on April 4, 2005 to all holders of
record of common stock as of the record date. If a shareholder's shares are held
in the name of a broker, bank or other nominee, then that party should give the
shareholder instructions for voting the shareholder's shares.

VOTING AT THE MEETING

The Board of Directors of the Corporation has fixed the close of business
on March 1, 2005 as the record date for the determination of shareholders
entitled to notice of, and to vote at, the Annual Meeting of Shareholders and
any adjournment thereof. The Corporation has only one class of common stock and
no preferred stock. As of March 1, 2005, there were 4,896,430 shares of common
stock of the Corporation outstanding. Each outstanding share entitles the holder
thereof to one vote on each separate matter presented for vote at the meeting.
Shareholders may vote on matters that are properly presented at the meeting by
either attending the meeting and casting a vote or by signing and returning the
enclosed proxy. If the enclosed proxy is executed and returned, it may be
revoked at any time before it is exercised at the meeting. All shareholders are
encouraged to date and sign the enclosed proxy, indicate their choice with
respect to the matters to be voted upon, and return it to the Corporation.

The Corporation will hold the Annual Meeting of Shareholders if holders of
a majority of the Corporation's shares of common stock entitled to vote are
represented in person or by proxy at the meeting. If a shareholder signs and
returns the proxy, those shares will be counted to determine whether the
Corporation has a quorum, even if the shareholder abstains or fails to vote on
any of the proposals listed on the proxy.

If a shareholder's share are held in the name of a nominee, and the
shareholder does not tell the nominee how to vote the shares (referred to as
broker non-votes), then the nominee can vote them as it sees fit only on matters
that are determined to be routine and not on any other proposal. Broker
non-votes will be counted as present to determine if a quorum exists but will
not be counted as present and entitled to vote on any nonroutine proposals.

In the election of directors, director nominees receiving a plurality of
votes cast at the meeting will be elected directors of the Corporation. Shares
not voted, including broker non-votes, have no effect on the election of
directors.

ELECTION OF DIRECTORS

The Board of Directors is divided into three classes, with the directors in
each class being elected for a term of three years. At the Annual Meeting of
Shareholders, four directors will be elected for terms ending with the annual
meeting of shareholders in 2008. In accordance with the retirement guidelines
set forth in the Corporation's Bylaws, on May 31, 2004, Frederick L. Bradford
and on July 31, 2004, Gerald D. Cassel retired as directors. At its June 29,
2004 meeting, the Board of Directors elected David J. Maness to fill the
directorship left vacant by Frederick Bradford's retirement. In August 2004,
Herbert C. Wybenga passed

away. The Board of Directors has nominated Sandra L. Caul and Timothy M. Miller
to stand for election with terms ending in 2008 to fill the vacancies resulting
from Gerald D. Cassel's retirement and Mr. Wybenga's death.

Except as otherwise specified in the proxy, proxies will be voted for
election of the four nominees named below. If a nominee becomes unable or
unwilling to serve, proxies will be voted for such other person, if any, as
shall be designated by the Board of Directors. However, the Corporation's
management now knows of no reason to anticipate that this will occur. The four
nominees for election as directors who receive the greatest number of votes cast
will be elected directors. Each of the nominees has agreed to serve as a
director if elected.

THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE ELECTION
OF EACH OF THE FOUR DIRECTOR NOMINEES NOMINATED BY THE BOARD OF DIRECTORS.

Nominees for election and current directors are listed below. Also shown
for each nominee and each current director is his or her principal occupation
for the last five or more years, age and length of service as a director of the
Corporation.

DIRECTOR NOMINEES FOR TERMS ENDING IN 2008

Richard J. Barz (age 56) was appointed director of the Corporation in 2002.
He has been a director of Isabella Bank and Trust since 2000. Mr. Barz also
serves on the Board of Farmers State Bank, IBT Title and Insurance Agency, Inc.,
and Financial Group Information Services and is a member of the Compensation and
Benefits Committee. Mr. Barz has been President and CEO of Isabella Bank and
Trust since December 30, 2001. Prior to his appointment as President and CEO he
served as Executive Vice President of Isabella Bank and Trust.

Sandra L. Caul (age 61) currently serves as director of Isabella Bank and
Trust and IBT Title and Insurance Agency, Inc. Ms. Caul retired in January 2005
as a state representative of the Michigan State House of Representatives. Ms.
Caul is a registered nurse.

Timothy M. Miller (age 53) has served as a director of Farmers State Bank
since 2002. Mr. Miller also serves as a director of Isabella Bank and Trust and
Financial Group Information Services. Mr. Miller has been President and CEO of
Farmers State Bank since January 1, 2003. Prior to his appointment as President
and CEO he served as Senior Vice President of Farmers State Bank.

Ronald E. Schumacher (age 68) has been a director of Isabella Bank and
Trust since 1984, and the Corporation since 1988. He also serves on the
Compensation and Benefits Committee, Audit Committee and serves as chairperson
of the Nominating and Corporate Governance Committee. Mr. Schumacher is the
President of A. Schumacher Sons, a grain and beef farm operation.

CURRENT DIRECTORS WITH TERMS ENDING IN 2006

Dennis P. Angner (age 49) has been a director of the Corporation since
2000. He also serves as an ex-officio member of all of the Corporation's
subsidiary Boards of Directors and committees. Mr. Angner has been President and
CEO of the Corporation since December 30, 2001. Prior to his appointment as
President and CEO, he served as Executive Vice President of the Corporation.

David J. Maness (age 51) was appointed as a director of the Corporation in
2004, and serves on the Finance and Planning Committee and the Audit Committee.
He also serves on the Board of Directors of Isabella Bank and Trust and
Financial Group Information Services. Mr. Maness is President of Maness
Petroleum, a geological and geophysical consulting service.

W. Joseph Manifold (age 53) was appointed to IBT Bancorp's Board of
Directors in July 2003, and serves as chairperson of the Audit Committee. Mr.
Manifold also serves as a director of IBT Title and Insurance Agency, Inc. Mr.
Manifold is a Certified Public Accountant and Controller of Federal Broach &
Machine Company, a manufacturing company.

William J. Strickler (age 64) has been a director of the Corporation since
2002, and serves as chairperson of the Compensation and Benefits Committee, and
also serves on the Nominating and Corporate Governance Committee. He has been a
director of Isabella Bank and Trust since 1995. Mr. Strickler is President of
Michiwest Energy, an oil and gas producer.

DIRECTORS WITH TERMS ENDING IN 2007

James C. Fabiano (age 61) has been a director of Isabella Bank and Trust
since 1979 and of the Corporation since 1988, of which he is currently serving
as Chairman and is an ex-officio member of all committees. He also serves as an
ex-officio member of all the Corporation's subsidiary Boards of Directors. Mr.
Fabiano is President and CEO of Fabiano Brothers, Inc., a wholesale distributor
of beer, wine and certain specialty beverages.

David W. Hole (age 67) has been a director of Isabella Bank and Trust since
1982. He has served on the Board of the Corporation since 1988 and serves on the
Compensation and Benefits Committee and the Finance and Planning Committee. He
currently is a director of Financial Group Information Services. He retired as
President and CEO of Isabella Bank and Trust and the Corporation on December 30,
2001.

Dale Weburg (age 61) has been a director of Farmers State Bank since 1987.
He has served on the Board of the Corporation since 2000 and is a member of the
Financial Group Information Services Board of Directors. He also serves on the
Nominating and Corporate Governance Committee, Audit Committee and is
chairperson of the Finance and Planning Committee. Mr. Weburg is President of
Weburg Farms, a cash crop farm operation.

Each of the directors has been engaged in their stated professions for more
than five years. The principal occupation of Dennis P. Angner is with the
Corporation, and he has been employed by Isabella Bank and Trust and/or the
Corporation since 1984. Other executive officers of the Corporation include:
Richard J. Barz, President of Isabella Bank and Trust, an employee of the Bank
since 1972; Timothy M. Miller, President of Farmers State Bank, an employee of
the Bank since 1985; Mary Ann Breuer (age 65), Senior Vice President and Cashier
of Isabella Bank and Trust, an employee of the Bank since 1959. All officers of
the Corporation serve at the pleasure of the Board of Directors.

COMMITTEES OF THE BOARD OF DIRECTORS AND MEETING ATTENDANCE

The Board of Directors of the Corporation met 15 times during 2004. All
incumbent directors attended 75% or more of the meetings held in 2004. The Board
of Directors has an Audit Committee, a Nominating and Corporate Governance
Committee, a Compensation and Benefits Committee and a Finance and Planning
Committee.

The Audit Committee is composed of independent directors who meet the
requirements for independence as defined in Rule 4200(a)(15) of the National
Association of Securities Dealers' listing standards. Information regarding the
functions performed by the Committee, its membership, and the number of meetings
held during the year, is set forth in the "Report of the Audit Committee"
included elsewhere in this annual proxy statement. The Audit Committee is
governed by a written charter approved by the Board of Directors and is included
as Appendix A. In accordance with the provisions of the Sarbanes - Oxley Act of
2002, Director Manifold meets the requirement of Audit Committee Financial
Expert and has been so designated by the Board of Directors.

The Corporation has a standing Nominating and Corporate Governance
Committee consisting of independent directors who meet the requirements for
independence as defined in Rule 4200(a)(15) of the National Association of
Securities Dealers' listing standards. The Committee consists of directors
Schumacher, Strickler and Weburg. The Nominating and Corporate Governance
Committee held 2 meetings in 2004, and all directors attended 75% or more of the
meetings in 2004. The Board of Directors has approved a Nominating and Corporate
Governance Committee Charter and it is included as Appendix B. The Nominating
and Corporate Governance Committee is responsible for evaluating and
recommending individuals for nomination to the Board of Directors for approval.
In making its selections and recommendations, the

Nominating and Corporate Governance Committee considers a variety of factors,
which generally include the candidate's personal and professional integrity,
independence, business judgment, and communication skills.

The Nominating and Corporate Governance Committee will consider as
potential nominees, persons recommended by shareholders. Recommendations should
be submitted in writing to the Secretary of the Corporation, 200 East Broadway,
Mount Pleasant, Michigan 48858 and include the shareholder's name, address and
number of shares of the Corporation owned by the shareholder. The recommendation
should also include the name, age, address and qualifications of the recommended
candidate for nomination. Recommendations for the 2006 Annual Meeting of
Shareholders should be delivered no later than December 5, 2005. The Nominating
and Corporate Governance Committee does not evaluate potential nominees for
director differently based on whether they are recommended to the Nominating and
Corporate Governance Committee by a shareholder.

The Finance and Planning Committee evaluates new business opportunities and
business acquisitions, assists management in establishing financial goals,
reviews all strategic plans of subsidiaries to assure consistency with overall
corporate goals and reviews interest rate risks, credit risks and insurance
coverage. The committee consists of directors Weburg, Maness, Hole, and Barz.

REPORT OF THE AUDIT COMMITTEE

The Audit Committee oversees the Corporation's financial reporting process
on behalf of the Board of Directors. The Committee consists of directors Maness,
Schumacher, Manifold, and Weburg.

The Audit Committee is responsible for pre-approving all auditing services
and permitted non-audit services to be performed during 2004 or thereafter for
the Corporation by its independent auditors or any other auditing or accounting
firm, except as noted below. The Audit Committee has established general
guidelines for the permissible scope and nature of any permitted non-audit
services in connection with its annual review of the audit plan and reviews the
guidelines with the Board of Directors.

Management has the primary responsibility for the consolidated financial
statements and the reporting process including the systems of internal controls.
In fulfilling its oversight responsibilities, the Committee reviewed the audited
consolidated financial statements in the Annual Report with management including
a discussion of the quality, not just the acceptability, of the accounting
principles, the reasonableness of significant judgments, and the clarity of
disclosures in the consolidated financial statements. The Committee also
reviewed with management and the independent auditors, management's assertion on
the design and effectiveness of the Corporation's internal control over
financial reporting as of December 31, 2004.

The Committee reviewed with the independent auditors, who are responsible
for expressing an opinion on the conformity of those audited consolidated
financial statements with accounting principles generally accepted in the United
States of America, their judgments as to the quality, not just the
acceptability, of the Corporation's accounting principles and such other matters
as are required to be discussed with the Committee by the standards of the
Public Company Accounting Oversight Board (United States), including those
described in SAS 61, as may be modified or supplemented. In addition, the
Committee has received the written disclosures and the letter from the
independent accountants required by Independence Standards Board Standard No. 1
as may be modified or supplemented, and has discussed with the independent
accountant the independent accountant's independence.

The Committee discussed with the Corporation's internal and independent
auditors the overall scope and plans for their respective audits. The Committee
meets with the internal and independent auditors, with and without management
present, to discuss the results of their examinations, their evaluations of the
Corporation's internal controls and the overall quality of the Corporation's
financial reporting process. The Committee held nine meetings during 2004, and
all directors attended 75% or more of the meetings held in 2004.

In reliance on the reviews and discussions referred to above, the Committee
recommended to the Board of Directors (and the Board has approved) that the
audited consolidated financial statements and report on management's assertion
on the design and effectiveness of internal control over financial reporting be
included in the Annual Report on Form 10-K for the year ended December 31, 2004
for filing with the Securities and Exchange Commission. The Committee is
reviewing the appointment of independent auditors for the 2005 audit.

Respectfully submitted,

/s/ W. Joseph Manifold
--------------------------------------
W. Joseph Manifold, Audit Committee
Chairperson

David J. Maness
Ronald E. Schumacher
Dale D. Weburg

EXECUTIVE OFFICERS

Executive Officers of the Corporation are compensated in accordance with
their employment with the applicable entity. The executive officers of the
Corporation whose annual compensation exceeded $100,000 for the periods
indicated are as follows:

SUMMARY COMPENSATION TABLE

ANNUAL
COMPENSATION
---------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) COMPENSATION(2)
--------------------------- ---- --------- ---------------

Dennis P. Angner,................................... 2004 $251,200 $ 9,012
President and CEO of IBT Bancorp 2003 218,090 8,390
2002 204,605 12,607
Richard J. Barz,.................................... 2004 $242,000 $11,162
Senior Vice President of IBT Bancorp and 2003 216,340 8,993
President and CEO of Isabella 2002 200,980 13,735
Bank and Trust
Tim Miller,......................................... 2004 $141,515 $ --
Vice President of IBT Bancorp and President 2003 128,396 1,770
and CEO of Farmers State Bank(3)

---------------

(1) Includes compensation voluntarily deferred under the Corporation's 401(k)
and Non-qualified Deferred Salary Agreement and Board of Directors fees,
paid in cash or deferred under the Non-qualified Deferred Directors
Compensation Plan.

(2) The amounts shown represent contributions by the Corporation under its
Employee Stock Ownership Plan (ESOP), in which substantially all employees
participate and expenses related to a nonqualified supplemental Executive
Retirement Plan (ERP). The amounts contributed are as follows:

YEAR ESOP ERP
---- ------ -------

Dennis P. Angner............................................ 2004 $ -- $ 9,012
2003 3,006 5,384
2002 4,262 8,345
Richard J. Barz............................................. 2004 $ -- $11,162
2003 2,982 6,011
2002 4,353 9,382
Tim Miller.................................................. 2004 $ -- $ --
2003 1,770 --

(3) Mr. Miller was appointed President of Farmers State Bank on January 1, 2003.

The Corporation believes it generally maintains a conservative level of
perquisites and personal benefits. The dollar value of perquisites and personal
benefits provided to the named executive officer does not exceed 10% of his
annual compensation.

REPORT ON EXECUTIVE COMPENSATION

Dennis P. Angner serves as President and Chief Executive Officer of the
Corporation. With the exception of Dennis P. Angner, services performed by other
executive officers of the Corporation are incidental to their primary services
as officers and employees of a subsidiary Bank, and they receive no compensation
directly from the Corporation. The compensation for the President of IBT Bancorp
and its subsidiaries is reviewed by the Corporation's Compensation and Benefits
Committee and approved by the Corporation's Board of Directors based on
recommendations from the Compensation and Benefits Committee.

The Committee's approach to determining the annual salary of executive
officers is to offer competitive salaries in comparison with other comparable
financial institutions. The Committee utilizes regional and national
compensation surveys which provide salary ranges for banks of similar size.
Based on these surveys, the Committee establishes salary ranges for all job
classifications. In setting salaries, the Corporation seeks to assure relative
fairness in the compensation of officers and to recognize the value of their
contribution to the Corporation's overall success. Specific factors used to
decide where an executive officer salary should be within the established range
include the historical financial performance, financial performance outlook,
years of service, and job performance. The salary paid to Dennis P. Angner,
President and Chief Executive Officer of the Corporation, was in the 25th to
50th percentile in 2004. The Board's primary consideration in where Angner's
salary fits within the defined range was based on a discretionary evaluation of
his personal performance and years of service as President and CEO, and the
Corporation exceeding its financial performance goals in 2003.

Respectfully submitted,

William J. Strickler, Chairperson
Dennis P. Angner
Richard J. Barz
James C. Fabiano
David W. Hole
Ronald E. Schumacher

THE DEFINED BENEFIT PENSION PLAN

The Corporation sponsors a defined benefit pension plan. This plan was
originally adopted in 1973 and was substantially revised in 1989. Only employees
who have attained the age of 21 and who have worked more than 1,000 hours in the
current plan year are eligible to participate.

Annual contributions are made to the plan as required by accepted actuarial
principles, applicable federal tax law, and expenses of operating and
maintaining the plan. The amount of contributions on behalf of any one
participant cannot be separately or individually computed.

Pension plan benefits are based on an average of a participant's five
highest years of compensation. A participant may earn a benefit for up to 35
years of accredited service. Earned benefits are 100 percent vested after five
years of service. Benefit payments normally start when a participant reaches age
65. A participant with more than five years of service may elect to take early
retirement benefits anytime after reaching age 55. Benefits payable under early
retirement are reduced actuarially for each month prior to age 65 in which
benefits begin.

The following table indicates estimated annual benefits payable upon normal
retirement for various compensation levels and years of service. Additional
benefits may be earned due to integration of social security benefits. The
amounts that may be earned are undeterminable until retirement.

FIVE YEAR
AVERAGE YEARS OF ACCREDITED SERVICE
OF HIGHEST ------------------------------------
COMPENSATION 5 15 25 35
------------ ------ ------- ------- -------

$ 20,000 $ 900 $ 2,700 $ 4,500 $ 6,300
50,000 2,250 6,750 11,250 15,750
75,000 3,375 10,125 16,875 23,625
100,000 4,500 13,500 22,500 31,500
125,000 5,625 16,875 28,125 39,375
150,000 6,750 20,250 33,750 47,750
200,000 7,875 23,625 39,375 56,125

The amounts calculated under the plan's benefit formula assume a monthly
payment for life. A married participant will generally receive an actuarially
reduced monthly payment because the participant's surviving spouse will also
receive monthly payments for life after the participant's death. As of December
31, 2004, Richard J. Barz had 32 years, Dennis P. Angner had 21 years, and
Timothy M. Miller had four years of credited service under the plan.

COMPENSATION AND BENEFITS COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation and Benefits Committee of the Corporation is responsible
for reviewing and recommending to the Corporation's Board of Directors the
compensation of the Corporation's President and its subsidiaries, benefit plans
and the overall percentage increase in salaries. The committee consists of
directors Strickler, Schumacher, Hole, Fabiano, Barz and Angner. Director Barz
did not participate in any of the procedures which pertain to executive officers
compensation and was excused from the meetings at such times. Director Angner
participated in deliberations concerning compensation of other executive
officers, however, was excused from the meeting at which his compensation was
set.

REMUNERATION OF DIRECTORS

The Corporation paid $750 per board meeting to its directors during 2004
and $200 per committee meeting attended. Directors of Isabella Bank and Trust
were paid a $1,200 retainer, $700 per board meeting and $200 per committee
meeting attended. Farmers State Bank paid a retainer of $2,000, $425 per board
meeting, and $125 per committee meeting attended (provided the committee meeting
was on a non-board meeting day). Directors who are officers of a subsidiary are
not paid for attendance at committee meetings.

The Corporation sponsors a deferred compensation plan for directors (the
Directors' Plan). The Directors' Plan was adopted in 1984 and was substantially
revised in 1989 and 1996 and was frozen as of December 31, 2004. Under the
Directors' Plan, deferred directors' fees are converted on a quarterly basis
into stock units of the Corporation's common stock. The fees are converted based
on the purchase price for a share of the Corporation's common stock under the
Corporation's Dividend Reinvestment Plan. The Plan was frozen and is under
review by the board as a result of new rules with respect to these types of
plans contained in the American Jobs Creation Act of 2004.

Pursuant to the terms of the Directors' Plan, directors of the Corporation
and its subsidiaries were required to defer at least 25% of their earned board
fees. The amount deferred under the terms of the Directors' Plan in 2004 was
$364,000, resulting in 10,323 stock units being credited to participants'
accounts. As of December 31, 2004, there were 148,975 stock units credited to
participants' accounts. Stock units credited to a participant's account are
eligible for cash and stock dividends as payable. All amounts deferred are
unsecured claims against the Corporation's general assets. The net cost of this
benefit to the Corporation was $91,000 in 2004.

Distribution from the Directors' Plan occurs when the participant
terminates service with the Corporation and/or attains age 65. Distributions may
take the form of shares of Corporation common stock equal to the number of stock
units credited to the participant's account, cash equal to the value of the
stock units on the date of distribution, or a combination of stock and cash. Any
Corporation common stock issued under the Directors' Plan will be considered
restricted stock under the Securities Act of 1933, as amended.

INDEBTEDNESS OF AND TRANSACTIONS WITH MANAGEMENT

Certain directors and officers of the Corporation and members of their
families were loan customers of the subsidiary Banks, or have been directors or
officers of corporations, or partners of partnerships which have had
transactions with the subsidiary Banks. In management's opinion, all such
transactions are made in the ordinary course of business and are substantially
on the same terms, including collateral and interest rates, as those prevailing
at the same time for comparable transactions with other customers. These
transactions do not involve more than normal risk of collectibility or present
other unfavorable features. Total loans to these customers were $9,505,000 as of
December 31, 2004.

STOCK PERFORMANCE

The graph on the following page compares the cumulative total shareholder
return on Corporation common stock for the last five years with the cumulative
total return on (1) the NASDAQ Stock Market Index, which is comprised of all
United States common shares traded on the NASDAQ and (2) the NASDAQ Bank Stock
Index, which is comprised of bank and bank holding company common shares traded
on the NASDAQ over the same period. The graph assumes the value of an investment
in the Corporation and each index was $100 at December 31, 1999, and all
dividends are reinvested.

STOCK PERFORMANCE
FIVE-YEAR TOTAL RETURN

(PERFORMANCE GRAPH)

The dollar values for total shareholder return plotted in the graph above
are shown in the table below:

COMPARISON OF FIVE YEAR CUMULATIVE
AMONG IBT BANCORP, NASDAQ STOCK MARKET,
AND NASDAQ BANK STOCKS

NASDAQ
YEAR IBT BANCORP NASDAQ BANKS
---- ----------- ------ ------

12/31/99 100.0 100.0 100.0
12/31/00 112.0 59.6 114.7
12/31/01 125.5 50.9 126.2
12/31/02 149.0 35.0 131.9
12/31/03 173.2 52.8 171.4
12/31/04 203.0 58.0 190.6

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of March 1, 2005 as
to the common stock of the Corporation owned of record or beneficially by any
person who is known to the Corporation to be the beneficial owner of more than
5% of the common stock of the Corporation.

AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
-----------------------------------------------
SOLE VOTING SHARED VOTING PERCENTAGE OF
AND INVESTMENT AND INVESTMENT COMMON STOCK
NAME AND ADDRESS OF OWNER POWERS POWERS OUTSTANDING
------------------------- -------------- -------------- -------------

James J. McGuirk............................ 308,926 -- 6.31%
P.O. Box 222
Mt. Pleasant, MI

The following table sets forth certain information as of March 1, 2005 as
to the common stock of the Corporation owned beneficially by each director and
director nominee, by each named executive officer, and by all directors,
director nominees and executive officers of the Corporation as a group.

AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP
-----------------------------------------------
SOLE VOTING SHARED VOTING PERCENTAGE OF
AND INVESTMENT AND INVESTMENT COMMON STOCK
NAME OF OWNER POWERS POWERS OUTSTANDING
------------- -------------- -------------- -------------

Dennis P. Angner*........................... 9,170 80 0.19%
Richard J. Barz*............................ 10,488 -- 0.22%
Sandra L. Caul.............................. 7,742 0.16%
James C. Fabiano............................ 203,098 -- 4.15%
David W. Hole............................... -- 14,195 0.29%
W. Joseph Manifold.......................... 253 -- 0.01%
Timothy M. Miller........................... 26 1,036 0.02%
Ronald E. Schumacher........................ -- 14,222 0.29%
William J. Strickler........................ 60,986 2,877 1.30%
Dale D. Weburg.............................. 48,572 -- 0.99%
David J. Maness............................. 102 -- --
All Directors, nominees and Executive
Officers as a Group....................... 332,695 40,152 7.62%

---------------

* Trustees of the ESOP who vote ESOP stock.

AS TO OTHER BUSINESS WHICH MAY COME BEFORE THE MEETING

Management of the Corporation does not intend to bring any other business
before the meeting for action. However, if any other business should be
presented for action, it is the intention of the persons named in the enclosed
form of proxy to vote in accordance with their judgment on such business.

RELATIONSHIP WITH INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Audit Committee is reviewing the appointment of independent auditors of
the Corporation for the year ending December 31, 2005.

A representative of Rehmann Robson, P.C., is expected to be present at the
Annual Meeting of Shareholders to respond to appropriate questions from
shareholders and to make any comments they believe appropriate.

FEES FOR PROFESSIONAL SERVICES PROVIDED BY REHMANN ROBSON P.C.

The following table shows the aggregate fees billed by Rehmann Robson P.C.
for audit and other services provided to the Corporation for 2004 and 2003.

2004 2003
-------- --------

Audit Fees.................................................. $ 72,750 $ 65,100
Audit Related Fees.......................................... 29,900 18,500
Tax Fees.................................................... 24,195 31,320
Other Professional Services Fees............................ 31,029 51,510
-------- --------
Total..................................................... $157,874 $166,430
======== ========

The audit fees were for performing the audit of the Corporation's
consolidated annual financial statements, review of interim quarterly financial
statements included in the Corporation's Forms 10-Q, and services that are
normally provided by Rehmann Robson P.C. in connection with statutory and
regulatory filings or engagements.

The audit related fees were for professional services provided in
conjunction with expanded allowance for loan loss evaluation and various SEC
matters.

The tax fees were for the preparation of the Corporation and its
subsidiaries' state and federal tax returns and for consultation with the
Corporation on various tax matters.

Other professional service fees were for, information security review,
Federal Home Loan Bank required procedures, strategic planning consultation, and
out of pocket costs. The Audit Committee has considered whether the services
provided by Rehmann Robson P.C., other than the audit fees, is compatible with
maintaining Rehmann Robson P.C. independence and believes that the other
services provided are compatible.

PRE-APPROVAL POLICIES AND PROCEDURES

All audit and non-audit services to be performed by Rehmann Robson P.C.
must be approved in advance by the Audit Committee. As permitted by the SEC's
rules, the Audit Committee has authorized its Chairman to pre-approve audit,
audit-related, tax and non-audit services, provided that such approved service
is reported to the full Audit Committee at its next meeting.

As early as practicable in each calendar year, the independent auditor
provides to the Audit Committee a schedule of the audit and other services that
the independent auditor expects to provide or may provide during the next twelve
months. The schedule will be specific as to the nature of the proposed services,
the proposed fees, and other details that the Audit Committee may request. The
Audit Committee will by resolution authorize or decline the proposed services.
Upon approval, this schedule will serve as the budget for fees by specific
activity or service for the next twelve months.

A schedule of additional services proposed to be provided by the
independent auditor, or proposed revisions to services already approved, along
with associated proposed fees, may be presented to the Audit Committee for their
consideration and approval at any time. The schedule will be specific as to the
nature of the proposed service, the proposed fee, and other details that the
Audit Committee may request. The Audit Committee will by resolution authorize or
decline authorization for each proposed new service.

Applicable SEC rules and regulations permit waiver of the pre-approval
requirements for services other than audit, review or attest services if certain
conditions are met. Out of the services characterized above as Audit-Related,
Tax and Professional Services, none were billed pursuant to these provisions in
2004 and 2003 without pre-approval.

SHAREHOLDER PROPOSALS

Any proposals which shareholders of the Corporation intend to present at
the next annual meeting of the Corporation must be received before December 5,
2005 to be considered for inclusion in the Corporation's proxy statement and
proxy for that meeting. Proposals should be made in accordance with Securities
and Exchange Commission Rule 14a-8.

COMMUNICATIONS WITH THE BOARD

Shareholders may communicate with the Corporation's Board of Directors by
sending written communications to the Corporation's Secretary, IBT Bancorp,
Inc., 200 East Broadway, Mount Pleasant, Michigan 48858. Communications will be
forwarded to the Board of Directors or the appropriate committee, as soon as
practicable.

DIRECTORS' ATTENDANCE AT THE ANNUAL MEETING OF SHAREHOLDERS

The Corporation's directors are encouraged to attend the annual meeting of
shareholders. At the 2004 annual meeting, all directors were in attendance.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires the
Corporation's directors and certain officers and persons who own more than ten
percent of the Corporation's common stock, to file with the SEC initial reports
of ownership and reports of changes in ownership of the Corporation's common
stock. These officers, directors, and greater than ten percent shareholders are
required by SEC regulation to furnish the Corporation with copies of these
reports.

To the Corporation's knowledge, based solely on review of the copies of
such reports furnished to the Corporation, during the year ended December 31,
2004 all Section 16(a) filing requirements were satisfied, with respect to the
applicable officers, directors, and greater than 10 percent beneficial owners.

OTHER MATTERS

The cost of soliciting proxies will be borne by the Corporation. In
addition to solicitation by mail, officers and other employees of the
Corporation may solicit proxies by telephone or in person, without compensation
other than their regular compensation.

By order of the Board of Directors

/s/ Mary Ann Breuer
Mary Ann Breuer, Secretary

APPENDIX A

(IBT BANCORP, INC. LOGO)

CHARTER OF THE
AUDIT COMMITTEE OF THE
BOARD OF DIRECTORS OF
IBT BANCORP, INC.

I. ORGANIZATION

The members of the Audit Committee are appointed annually by the Board of
Directors (the "Board") of IBT Bancorp, Inc. (the "Corporation") from among the
Corporation's directors. The members shall serve until their successors are duly
elected and qualified by the Board. The Board determines the number of members
on the Audit Committee from time to time, but the number will not be less than
the minimum number prescribed by applicable law or the Corporation's Bylaws. In
no event will such number of members be less than five (5). Audit Committee
members must fully satisfy independence and experience requirements as
prescribed by Rule 4200(a) (15) of the National Association of Securities
Dealers' listing standards, Section 10A of the Securities Exchange Act of 1934
(the "Exchange Act") and the rules and regulations of the Securities and
Exchange Commission ("SEC"), and the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") and applicable rules and regulations there
under. In general, these rules require that the Audit Committee member not have
any relationship which would interfere with the exercise of independent judgment
in carrying out the responsibilities of a director.

At least one member of the Audit Committee shall be a "financial expert" as
defined by the rules of the SEC (a copy of this definition is attached). In
general, to be considered a "financial expert", an audit committee member must
have the following attributes:

- An understanding of generally accepted accounting principles ("GAAP") and
financial statements;

- The ability to assess the general application of GAAP in connection with
the accounting for estimates, accruals and reserves;

- Experience preparing, auditing, analyzing or evaluating financial
statements that present a breadth and level of complexity of accounting
issues that are generally comparable to the breadth and complexity of
issues that can reasonably be expected to be raised by the Corporation's
financial statements, or experience actively supervising one or more
persons engaged in such activities;

- An understanding of internal controls and procedures for financial
reporting; and

- An understanding of audit committee functions.

All members of the Audit Committee shall have a strong level of accounting
or financial acumen and shall be able to read and understand fundamental
financial statements at the time of their appointment to the Audit Committee. No
member of the Audit Committee may be an "affiliated person" of the Corporation
or any of its subsidiaries (as defined in the federal securities laws). In
general, an affiliated person is a person who is an employee of the Corporation
or who was an employee of the corporation within the three previous years.

Director's fees are the only compensation that an Audit Committee member
may receive directly or indirectly from or on behalf of the Corporation.

The Board will appoint one of the members of the Audit Committee to serve
as Audit Committee Chair. The Audit Committee may also appoint a Secretary, who
need not be a director.

The Audit Committee has the authority, to the extent it deems necessary or
appropriate, to retain independent legal, accounting or other advisors. The
Audit Committee shall also have the authority, to the extent it deems necessary
or appropriate, to ask the Corporation to provide the Audit Committee with the
support of one or more Corporation employees to assist it in carrying out its
duties. The Corporation shall provide for appropriate funding, as determined
solely by the Audit Committee, for payment of compensation to the independent
auditors for the purpose of rendering or issuing an audit report and to any
other advisors employed by the Audit Committee, and for the ordinary
administrative expenses of the Audit Committee that are necessary or appropriate
in carrying out its duties. The Audit Committee may request any officer or
employee of the Corporation or the Corporation's outside counsel, independent
auditors or other advisors to attend a meeting of the Audit Committee or to meet
with any members of, or consultant to, the Audit Committee.

The Audit Committee is directly and solely responsible for the appointment,
compensation, and oversight of the work of the independent auditor (including
resolution of disagreements between management and the auditors regarding
financial reporting) for the purpose of preparing or issuing an audit report or
related work. The independent auditors shall report directly to the Audit
Committee.

The Audit Committee shall provide assistance to the corporate directors in
fulfilling their responsibility to the shareholders, potential shareholders,
outside auditors, government agencies, and investment community relating to
corporate accounting, reporting practices of the Corporation, and the quality
and integrity of the financial reports of the Corporation. In so doing, it is
the responsibility of the Audit Committee to maintain free and open means of
communication between the directors, the independent auditors, the internal
auditors, and the senior management of the Corporation.

II. STATEMENT OF POLICY AND PURPOSE OF THE AUDIT COMMITTEE

The Audit Committee shall provide assistance to the Board by monitoring:

1) the integrity of the financial statements of the Corporation;

2) the independent auditors' qualifications and independence;

3) the performance of the Corporation's and its subsidiaries' internal
audit function and independent auditors;

4) the Corporation's system of internal controls;

5) the Corporation's financial reporting and system of disclosure
controls; and

6) the compliance by the Corporation with legal and regulatory
requirements and with the Corporation's Code of Business Conduct and
Ethics.

The Audit Committee shall prepare the Audit Committee report required by
the rules of the SEC to be included in the Corporation's annual proxy statement.

The Audit Committee's job is one of oversight as set forth in this charter.
It is not the duty of the Audit Committee to prepare the Corporation's financial
statements, to plan or conduct audits, or to determine that the Corporation's
financial statements are complete and accurate and are in accordance with GAAP.
The Corporation's management is responsible for preparing the Corporation's
financial statements and for maintaining internal controls, and the independent
auditors are responsible for auditing the financial statements. Nor is it the
duty of the Audit Committee to conduct investigations or to assure compliance
with laws and regulations and the Corporation's Code of Business Conduct and
Ethics.

III. RESPONSIBILITIES OF THE AUDIT COMMITTEE

A. CHARTER REVIEW

1. Review and reassess the adequacy of this charter at least annually and
recommend to the Board any proposed changes to this charter; and

2. Publicly disclose the charter and any such amendments at the times and
in the manner as required by the SEC and/or any other regulatory body having
authority over the Corporation.

B. FINANCIAL REPORTING/INTERNAL CONTROLS

1. Review and discuss with the internal auditors and the independent
auditors their respective annual audit plans, reports and the results of their
respective audits;

2. Review and discuss with management and the independent auditors the
Corporation's quarterly financial statements and its Form 10-Q (prior to filing
the same as required by the Exchange Act), including disclosures made in the
section regarding management's discussion and analysis, the results of the
independent auditors' reviews of the quarterly financial statements, and
determine whether the quarterly financial statements should be included in the
Corporation's Form 10-Q;

3. Review and discuss with management and the independent auditors the
Corporation's annual audited financial statements and its Form 10-K (prior to
filing the same as required by the Exchange Act), including disclosures made in
the section regarding management's discussion and analysis, and recommend to the
Board whether the audited financial statements should be included in the
Corporation's Form 10-K;

4. Review and discuss with management, and where appropriate, the
independent auditors, the Corporation's financial disclosures in its
registration statements, press releases, earnings releases, current reports,
real time disclosures, or other public disclosures before the same are filed,
posted, disseminated or released, including the use of "pro forma" or "adjusted"
non-GAAP information, all reconciliations of the same, and any earnings
guidance, as well as all financial information provided to rating agencies
and/or securities analysts including presentations at industry, investor or
other conferences;

5. Review and discuss with the Corporation's Chief Executive Officer and
Chief Financial Officer all matters such officers are required to certify in
connection with the Corporation's Form 10-Q and 10-K or other filings or
reports;

6. Discuss with management and the independent auditors, significant
financial reporting issues and judgments made in connection with the preparation
of the Corporation's financial statements, including any significant changes in
the Corporation's selection or application of accounting principles, the
development, selection and disclosure of critical accounting estimates and
principles and the use thereof, and analyses of the effect of alternative
assumptions, estimates, principles or GAAP methods on the Corporation's
financial statements;

7. Discuss with management and the independent auditors the effect of
regulatory and accounting initiatives and off-balance sheet transactions on the
Corporation's financial statements, conditions or results and any necessary
disclosures related thereto;

8. Discuss with management the Corporation's major financial risk exposures
and the steps management has taken to monitor and control such exposures,
including the Corporation's risk assessment and risk management policies;

9. Discuss with management, the Corporation's major components of internal
control over financial reporting and steps management has taken to ensure
adequate internal control over financial reporting exists.

10. Discuss with the independent auditors the matters required to be
discussed by Statement of Auditing Standards No. 61. These matters include:

- The auditor's responsibility under generally accepted auditing
standards.

- Significant accounting polices.

- Management judgments and accounting estimates.

- Audit adjustments.

- The auditor's judgments about the quality of the Corporation's
accounting principles.

- Other information in documents containing audited financial statements.

- Disagreements with management.

- Consultation with other accountants.

- Major issues discussed with management prior to retention.

- Difficulties encountered in performing the audit.

11. Discuss with the independent auditors any deficiencies in internal
control over financial reporting as required by Auditing Standards No. 2.

12. Confirm that the Corporation's independent auditors report to the Audit
Committee all of the Corporation's critical accounting policies and procedures
and alternative accounting treatments of financial information within GAAP that
have been discussed with management, including the ramifications of the use of
such alternative treatments and disclosures and the treatment preferred by the
independent auditors;

13. Confirm that the Corporation's independent auditors share with the
Audit Committee all material written communication between the auditors and
management;

14. Discuss with the Corporation's independent auditors, internal auditors,
and management their assessments of the adequacy of the Corporation's internal
controls and disclosure controls and procedures;

15. Assess whether management is resolving any internal control weaknesses
diligently;

16. Discuss with the Corporation's independent auditors, internal auditors
and management as appropriate the Corporation's FDICIA internal controls report
and the attestation of the Corporation's independent auditors to the same;

17. Discuss with the Corporation's independent auditors, internal auditors
and management as appropriate any weaknesses or deficiencies that any of the
foregoing have identified relating to financial reporting, internal controls or
other related matters and their proposals for rectifying such weaknesses or
deficiencies;

18. Monitor the Corporation's progress in promptly addressing and
correcting any and all identified weaknesses or deficiencies in financial
reporting, internal controls or related matters;

19. Receive periodic reports from the independent auditors and appropriate
officers of the Corporation on significant accounting or reporting developments
proposed by the Financial Accounting Standards Board or the SEC that may impact
the Corporation; and

20. Receive periodic reports from independent auditors and appropriate
officers of the Corporation on significant financial reporting, internal
controls or other related matters of the Corporation's subsidiaries.

C. INDEPENDENT AUDITORS

1. Retain, terminate, compensate, review and oversee the work of the
independent auditors (including resolution of disagreements between management
and the auditors regarding financial reporting);

2. The outside auditor is ultimately responsible to the Board of Directors
and the Audit Committee, as representatives of the shareholders. In connection
with this duty, the Committee shall receive on an annual basis a written
statement from the outside auditor detailing all relationships between the
outside auditor and the Corporation;

3. Review the experience, rotation and qualifications of the senior members
of the independent auditors' team;

4. Monitor the independence, qualifications and performance of the
independent auditors including, but not limited to, consideration of whether the
provision of any non-audit services is compatible with maintaining the auditors'
independence, and taking into account the opinions of management and the
internal auditors;

5. Meet with the independent auditors prior to each annual audit to discuss
the planning and staffing of the audit;

6. Pre-approve all auditing services and permitted non-audit services to be
performed for the Corporation by the independent auditors or any other auditing
or accounting firm, except as provided in this paragraph. In no event shall the
independent auditors perform any non-audit services for the Corporation which
are prohibited by Section 10A(g) of the Exchange Act or the rules of the SEC or
the Public Corporation Accounting Oversight Board (or other similar body as may
be established from time to time). Examples of the types of services that are
generally prohibited include:

- Bookkeeping or other services related to the accounting records or
financial statements of the audit client;

- Financial information systems design and implementation;

- Appraisal or valuation services, fairness opinions, or
contribution-in-kind reports;

- Actuarial services;

- Internal audit outsourcing services;

- Management functions or human resources;

- Broker or dealer, investment adviser, or investment banking services;

- Legal services and expert services unrelated to the audit; and

- Any other service that the Public Company Accounting Oversight Board
determines, by regulation, is impermissible.

7. The Audit Committee shall establish general guidelines for the
permissible scope and nature of any permitted non-audit services in connection
with its annual review of the audit plan and shall review such guidelines with
the Board. Pre-approval may be granted by action of the full Audit Committee or,
in the absence of such Audit Committee action, by the Audit Committee Chair
whose action shall be considered to be that of the entire Audit Committee.
Pre-approval shall not be required for the provision of non-audit services if
(i) the aggregate amount of all such non-audit services constitutes no more than
5% of the total amount of revenues paid by the Corporation to the auditors
during the fiscal year in which the non-audit services are provided, (ii) such
services were not recognized by the Corporation at the time of engagement to be
non-audit services, and (iii) such services are promptly brought to the
attention of the Audit Committee and approved prior to the completion of the
audit. Approval of a non-audit service to be performed by the auditors and, if
applicable, the guidelines pursuant to which such services were approved, shall
be disclosed when required as promptly as practicable in the Corporation's
quarterly or annual reports required by Section 13(a) of the Exchange Act;

8. Oversee the rotation of the lead (or coordinating) audit partner having
primary responsibility for the audit and the audit partner responsible for
reviewing the audit at least once every five years and considering whether, in
order to assure continuing auditor independence, it is appropriate to rotate the
auditing firm itself from time to time;

9. Recommend to the Board, policies for the Corporation's hiring of
employees or former employees of the independent auditors who participated in
any capacity in an audit of the Corporation, including in particular the
prohibition on employment under Section 10A (1) of the Exchange Act as chief
executive officer, controller, chief financial officer, chief accounting
officer, or any person serving in an equivalent position for the Corporation,
during the preceding one-year period; and

10. Ensure that the independent auditors have access to all necessary
Corporation personnel, records or other resources.

D. INTERNAL AUDIT FUNCTION

1. Review and oversee the appointment, performance and replacement of the
senior internal audit executive;

2. Review and approve any plan to outsource the internal audit function and
if so approved, review and oversee the appointment, performance and replacement
of the auditors.

3. Review the internal audit plan and assess whether it is consistent with
the Corporation's needs;

4. To the extent applicable, review the significant reports to management
prepared by the internal auditing department and management's responses;

5. Review and discuss with the internal auditors the results of their work
(including their audit report) as well as their control risk assessment;

6. Ensure that internal auditors do not have responsibilities that conflict
with their monitoring role;

7. Discuss with the independent auditors and approve the internal audit
department responsibilities, budget and staffing and any recommended changes in
the planned scope of the internal audit;

8. Ensure that internal auditors adhere to professional standards and
receive adequate training annually; and

9. Ensure that the internal auditors have access to all necessary
Corporation resources.

E. COMPLIANCE OVERSIGHT

1. Discuss with management and the internal auditors the Corporation's
processes regarding compliance with applicable laws and regulations and with the
Corporation's Code of Business Conduct and Ethics, obtain information from
management, the Corporation's senior internal auditing executive and the
independent auditors regarding compliance by the Corporation and its
subsidiary/affiliated entities with applicable legal requirements and the
Corporation's Code of Business Conduct and Ethics and from time to time advise
the Board with respect to the same.

2. Obtain from the independent auditors any reports required to be
furnished to the Audit Committee under Section 10A of the Exchange Act or an
assurance that Section 10A of the Exchange Act has not been implicated (Section
10A requires the independent auditors to report certain illegal acts. In
addition, Section 10A addresses reports of critical accounting policies and
practices used, alternative treatments of financial information within GAAP that
have been discussed with management and other material written communications
between the independent auditors and management);

3. Review procedures designed to identify related party transactions that
are material to the financial statements or otherwise require disclosure;

4. Establish procedures and require the Corporation to obtain or provide
the necessary resources and mechanisms for (i) the receipt, retention and
treatment of complaints received by the Corporation regarding accounting,
internal accounting controls or auditing matters, and (ii) the confidential,
anonymous submission by employees of the Corporation of concerns regarding
questionable accounting or auditing matters;

5. Discuss with management and the independent auditors any correspondence
with regulators or governmental agencies and any employee complaints or
published reports which raise material issues regarding the Corporation's
financial statements or accounting policies or compliance with the Corporation's
Code of Business Conduct and Ethics; and

6. Discuss with the Corporation's general counsel legal matters that may
have a material impact on the financial statements and that may have an impact
on the Corporation's compliance policies.

F. GENERAL

1. Meet as often as the Audit Committee or the Audit Committee Chair
determines, but not less frequently than quarterly;

2. On a regular basis, as appropriate, meet separately with management
(especially the Chief Financial Officer), the internal auditors, and with the
independent auditors;

3. Report to the Board on the Audit Committee's activities at each Board
meeting;

4. Maintain minutes or other records of the Audit Committee's meetings and
activities;

5. Review and assess the quality and clarity of the information provided to
the Audit Committee and make recommendations to management, and the independent
auditors as the Audit Committee deems appropriate from time to time for
improving such materials;

6. Form and delegate authority to subcommittees or members when
appropriate;

7. Prepare, or oversee the preparation of, the Audit Committee report to be
included in the Corporation's proxy statement when and as required by the rules
of the SEC; and

8. Annually review the performance of the Audit Committee.

In performing their duties and responsibilities, Audit Committee members
are entitled to rely in good faith on information, opinions, reports or
statements prepared or presented by:

- One or more officers or employees of the Corporation whom the Audit
Committee member reasonably believes to be reliable and competent in the
matters presented;

- Counsel, independent auditors, or other persons as to matters which the
Audit Committee member reasonably believes to be within the professional
or expert competence of such person; or

- Another committee of the Board as to matters within its designated
authority which committee the Audit Committee member reasonably believes
to merit confidence.

Approved by Audit Committee: December 13, 2004
Approved by Board of Directors: February 22, 2005
Last reviewed: February 22, 2005

APPENDIX B

IBT BANCORP, INC.
NOMINATING AND CORPORATE GOVERNANCE
COMMITTEE CHARTER

PURPOSE

The primary objectives of the Nominating and Corporate Governance Committee
of the Board of Directors of IBT Bancorp, Inc. are to identify individuals
qualified to become Board members, and to recommend that the Board elect the
director nominees for the next annual meeting of shareholders or to elect such
directors in the interim; to lead in the annual review of Board performance; and
to engage in such other activities as may be delegated to the Committee from
time to time by the Board of Directors.

MEMBERSHIP

The Committee shall be comprised of no fewer than 3 members, all
independent under NASD Rule 4200 (s)(15) and shall satisfy such other
requirements as shall be provided in the Corporation's Bylaws or as the Board
shall otherwise determine.

The members of the Committee and the Committee Chair shall be appointed,
and may be replaced, by the Board upon consideration of the recommendations of
the Nominating Committee. Changes in Committee composition and leadership shall
be considered at the annual organizational meeting of the Board. However, the
Board reserves the authority to make changes to Committee composition and
leadership at any time. Committee members and the Chair shall serve until they
are replaced, they resign, or their successors are duly elected and qualified.

MEETINGS

The Committee shall meet as often as may be deemed necessary or
appropriate, but no fewer than 2 times annually. The Committee may ask members
of management or others to attend meetings or to provide relevant information.
The Committee shall periodically meet in executive session absent management.

The Nominating and Corporate Governance Committee shall maintain a high
degree of independence both in establishing its agenda and directly accessing
various members of management.

RESPONSIBILITIES AND DUTIES

The Committee shall be responsible for matters related to service on the
Board of Directors of the Corporation and associated issues of corporate
governance. To fulfill its responsibilities, the Committee shall:

1. Review with the Board the criteria for Board membership.

2. Review the qualifications of individuals for consideration as
director candidates and recommend individual director candidates for
election. Among the qualifications considered in the selection of
candidates: business skills and experiences, prominence and reputation in
their profession, a broad business and social perspective, concern for the
long-term interests of the shareholders, and personal integrity and sound
judgment. In addition, directors must have time available to devote to
Board activities.

3. Prior to each annual meeting of shareholders, recommend to the
Board of Directors the individuals to constitute the nominees of the Board
of Directors, for whom the Board will solicit proxies.

4. Recommend to the Board of Directors candidates to fill any
vacancies on the Board of Directors.

5. Be responsible for the orientation process for new Directors and
advising independent Directors on suggestions for their continuing
education.

6. Make recommendations annually to the Board as to the independence
of Directors as defined by the Corporation's Bylaws and the NASD and SEC.

7. After consultation with the Chairman and Chief Executive Officer,
formally review each Director's continuation on the Board prior to their
nomination for re-election.

8. After consultation with the Chairman and Chief Executive Officer
and taking into consideration the preference of individual directors,
recommend to the Board the membership, including the chair, of each
standing committee.

9. In consultation with the Chairman and Chief Executive Officer,
assure review at Board meetings of topics suggested by Directors.

10. Periodically review and recommend to the Board revisions, as
appropriate, to the Board's Code of Business Conduct and Ethics and other
corporate governance guidelines.

11. Receive comments from all Directors and review annually the
overall effectiveness of the Board and recommend improvements where
warranted.

12. Periodically review the adequacy of this Charter.

13. Regularly report on Committee activities and findings to the
Board.

14. Have and exercise such other powers, authority and
responsibilities as may be determined by the Board of Directors.

15. Nominate Directors for the Board of Directors of IBT Title, and
the Board of Directors of FGIS (Financial Group Information Services).

The responsibilities and duties set forth above are meant to serve as a
guide, with the understanding that the Committee may diverge from the specific
duties enumerated as necessary or appropriate given the circumstances.

COMMITTEE AUTHORITY

The Committee shall undertake any other action or exercise such other
powers, authority and responsibilities as necessary or appropriate to the
discharge of the responsibilities and duties set forth in this Charter or the
Corporation's Bylaws, or otherwise required by other applicable laws, rules or
regulations, or as shall otherwise be determined by the Board.

In discharging its responsibilities and duties, the Committee is empowered
to investigate any matter brought to its attention that it determines to be
within the scope of its authority with full access to all books, records,
facilities and personnel of the Corporation. The Committee has the power to
retain outside counsel or other consultants or experts for this purpose, or to
advise the Committee, and shall receive funding from the Corporation to engage
such advisors.

The Committee shall have the sole authority to retain (and terminate), set
retention terms and approve the fees of any search firm used to identify
director candidates or any outside counsel or advisor it seeks to provide such
advice as the Committee shall deem necessary to the discharge of its
responsibilities and duties.

The Committee may delegate authority to individuals or subcommittees when
it deems appropriate. However, in delegating authority it shall not absolve
itself from the responsibilities it bears under the terms of this Charter.

Approved by Nominating & Corporate Governance Committee: 01/11/05
Approved by Board of Directors: 01/25/05

IBT BANCORP, INC.

FINANCIAL INFORMATION INDEX

PAGE DESCRIPTION
---- -----------

Summary of Selected Financial Data
24
Report of Independent Registered Public Accounting Firm
25
Consolidated Financial Statements
26 - 30
Notes to Consolidated Financial Statements
31 - 53
IBT Financial Review
54
Common Stock and Dividend Information
68

SUMMARY OF SELECTED FINANCIAL DATA

2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)

INCOME STATEMENT DATA
Total interest income................. $ 33,821 $ 35,978 $ 38,161 $ 40,798 $ 38,754
Net interest income................... 23,364 23,528 22,905 21,538 20,352
Provision for loan losses............. 735 1,455 1,025 770 565
Net income............................ 6,645 7,205 6,925 6,066 5,431
BALANCE SHEET DATA
End of year assets.................... $678,034 $664,079 $652,717 $592,143 $540,897
Daily average assets.................. 675,157 659,323 623,507 566,547 516,145
Daily average deposits................ 567,145 563,600 549,970 494,847 452,664
Daily average loans/net............... 430,854 399,008 390,613 399,239 380,392
Daily average equity.................. 70,787 65,770 59,540 54,787 50,506
PER SHARE DATA(1)
Net income............................ $ 1.36 $ 1.50 $ 1.46 $ 1.29 $ 1.16
Cash dividends........................ 0.63 0.60 0.55 0.50 0.45
Book value (at year end).............. 14.83 14.23 13.30 12.09 11.08
FINANCIAL RATIOS
Shareholders' equity to assets (year
end)............................... 10.71% 10.38% 9.71% 9.60% 9.60%
Net income to average equity.......... 9.39 10.95 11.63 11.07 10.75
Cash dividend payout to net income.... 46.20 39.99 37.33 38.36 38.30
Net income to average assets.......... 0.98 1.09 1.11 1.07 1.05

2004 2003
--------------------------------- ---------------------------------
4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
------ ------ ------ ------ ------ ------ ------ ------

Quarterly Operating Results:
Total interest income......... $8,563 $8,415 $8,393 $8,450 $8,560 $9,035 $9,119 $9,264
Interest expense.............. 2,659 2,562 2,566 2,670 2,819 3,070 3,238 3,323
Net interest income........... 5,904 5,853 5,827 5,780 5,741 5,965 5,881 5,941
Provision for loan losses..... 150 120 225 240 688 222 333 212
Noninterest income............ 1,963 2,063 2,199 1,940 1,927 2,891 2,973 2,954
Noninterest expenses.......... 5,724 5,502 5,477 5,568 5,819 5,809 5,879 6,071
Net income.................... 1,663 1,749 1,756 1,477 1,222 2,085 1,956 1,942
Per Share of Common Stock:(1)
Net income.................... $ 0.34 $ 0.36 $ 0.36 $ 0.30 $ 0.25 $ 0.43 $ 0.41 $ 0.41
Cash dividends................ 0.30 0.11 0.11 0.11 0.30 0.10 0.10 0.10
Book value.................... 15.01 14.86 14.57 14.30 14.23 14.21 14.15 13.69

---------------

(1) Retroactively restated for the 10% stock dividend paid on February 19, 2004.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
IBT Bancorp, Inc.
Mt. Pleasant, Michigan

We have audited the accompanying consolidated balance sheets of IBT
Bancorp, Inc. as of December 31, 2004 and 2003, and the related consolidated
statements of changes in shareholders' equity, income, comprehensive income, and
cash flows for each of the years in the three-year period ended December 31,
2004. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
IBT Bancorp, Inc. as of December 31, 2004 and 2003, and the consolidated results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2004 in conformity with accounting principles
generally accepted in the United States.

We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of IBT
Bancorp, Inc.'s internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control -- Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 11, 2005, expressed an unqualified opinion on
management's assessment of internal control over financial reporting and an
unqualified opinion on the effectiveness of internal control over financial
reporting.

/s/ Rehmann Robson P.C.

Rehmann Robson P.C.

Saginaw, Michigan
February 15, 2005

CONSOLIDATED BALANCE SHEETS

DECEMBER 31
-----------------------
2004 2003
---------- ----------
(DOLLARS IN THOUSANDS)

ASSETS
Cash and cash equivalents................................... $ 20,760 $ 25,918
Federal funds sold.......................................... -- 5,300
-------- --------
CASH AND CASH EQUIVALENTS................................. 20,760 31,218
Investment securities
Securities available for sale (amortized cost of
$161,561 in 2004 and $166,730 in 2003)................ 162,030 169,832
Securities held to maturity (fair value of $537 in 2004
and $1,349 in 2003)................................... 523 1,312
-------- --------
TOTAL INVESTMENT SECURITIES............................ 162,553 171,144
Mortgage loans available-for-sale........................... 2,339 4,315
Loans (net of the allowance for loan losses)................ 446,451 415,655
Premises and equipment...................................... 18,533 15,785
Bank-owned life insurance................................... 10,168 10,029
Accrued interest receivable................................. 4,315 4,534
Acquisition intangibles and goodwill, net................... 3,347 3,440
Other assets................................................ 9,568 7,959
-------- --------
TOTAL ASSETS......................................... $678,034 $664,079
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing.................................... $ 65,736 $ 67,760
NOW accounts........................................... 101,362 117,560
Certificates of deposit and other savings.............. 323,954 312,914
Certificates of deposit over $100...................... 72,824 69,473
-------- --------
TOTAL DEPOSITS.................................... 563,876 567,707
Other borrowed funds........................................ 30,982 18,053
Accrued interest and other liabilities...................... 10,582 9,383
-------- --------
TOTAL LIABILITIES.................................... 605,440 595,143
Shareholders' equity
Common stock -- no par value; 10,000,000 shares
authorized; 4,896,412 shares issued and outstanding
(4,403,404 shares at December 31, 2003)............... 66,908 47,491
Retained earnings........................................... 6,590 20,623
Accumulated other comprehensive (loss) income............... (904) 822
-------- --------
TOTAL SHAREHOLDERS' EQUITY............................. 72,594 68,936
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $678,034 $664,079
======== ========

The accompanying notes are an integral part of these consolidated financial
statements.
26

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

YEAR ENDED DECEMBER 31
------------------------------------
2004 2003 2002
---------- ---------- ----------
(DOLLARS IN THOUSANDS)

NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
Balance at beginning of year........................... $4,403,404 $4,336,283 $3,884,985
10% stock dividend..................................... 440,191 -- 388,758
Issuance of common stock............................... 57,388 70,340 81,326
Common stock repurchased............................... (4,571) (3,219) (18,786)
---------- ---------- ----------
BALANCE END OF YEAR............................... 4,896,412 4,403,404 4,336,283
========== ========== ==========
COMMON STOCK
Balance at beginning of year........................... 47,491 45,610 31,017
10% stock dividend..................................... 17,608 -- 12,829
Issuance of common stock............................... 2,001 2,008 2,383
Common stock repurchased............................... (192) (127) (619)
---------- ---------- ----------
BALANCE END OF YEAR............................... 66,908 47,491 45,610
RETAINED EARNINGS
Balance at beginning of year........................... 20,623 16,299 24,788
Net income............................................. 6,645 7,205 6,925
10% stock dividend..................................... (17,608) -- (12,829)
Cash dividends ($0.63 per share in 2004, $0.60 in 2003,
and $0.55 in 2002).................................. (3,070) (2,881) (2,585)
---------- ---------- ----------
BALANCE END OF YEAR............................... 6,590 20,623 16,299
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of year........................... 822 1,548 1,023
Other comprehensive (loss) income...................... (1,726) (726) 525
---------- ---------- ----------
BALANCE END OF YEAR............................... (904) 822 1,548
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY END OF YEAR.............. $ 72,594 $ 68,936 $ 63,457
========== ========== ==========

The accompanying notes are an integral part of these consolidated financial
statements.
27

CONSOLIDATED STATEMENTS OF INCOME

YEAR ENDED DECEMBER 31
---------------------------------
2004 2003 2002
--------- --------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER
SHARE DATA)

INTEREST INCOME
Loans, including fees..................................... $27,801 $29,193 $31,527
Investment securities
Taxable................................................ 3,841 4,588 4,362
Tax exempt............................................. 2,116 2,004 1,849
Federal funds sold and other.............................. 63 193 423
------- ------- -------
TOTAL INTEREST INCOME................................ 33,821 35,978 38,161
------- ------- -------
INTEREST EXPENSE
Deposits.................................................. 9,391 11,610 14,578
Borrowings................................................ 1,066 840 678
------- ------- -------
TOTAL INTEREST EXPENSE............................... 10,457 12,450 15,256
------- ------- -------
NET INTEREST INCOME.................................. 23,364 23,528 22,905
Provision for loan losses................................... 735 1,455 1,025
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES............................................ 22,629 22,073 21,880
NONINTEREST INCOME
Service charges and fees.................................. 4,735 5,141 2,681
Title insurance revenue................................... 1,957 2,340 2,221
Gain on sale of mortgage loans............................ 477 2,091 1,762
Other..................................................... 996 1,173 1,439
------- ------- -------
TOTAL NONINTEREST INCOME............................. 8,165 10,745 8,103
NONINTEREST EXPENSES
Compensation and benefits................................. 12,685 13,345 11,307
Occupancy................................................. 1,504 1,471 1,422
Furniture and equipment................................... 2,484 2,560 2,277
Charitable donations...................................... 109 1,158 815
Other..................................................... 5,489 5,044 4,951
------- ------- -------
TOTAL NONINTEREST EXPENSES........................... 22,271 23,578 20,772
------- ------- -------
INCOME BEFORE FEDERAL INCOME TAXES................... 8,523 9,240 9,211
Federal income taxes...................................... 1,878 2,035 2,286
------- ------- -------
NET INCOME........................................ $ 6,645 $ 7,205 $ 6,925
======= ======= =======
Net income per basic share of common stock.................. $ 1.36 $ 1.50 $ 1.46
======= ======= =======

The accompanying notes are an integral part of these consolidated financial
statements.
28

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

YEAR ENDING DECEMBER 31
---------------------------
2004 2003 2002
------- ------- -------
(DOLLARS IN THOUSANDS)

NET INCOME.................................................. $ 6,645 $ 7,205 $ 6,925
------- ------- -------
Other comprehensive (loss) income before income taxes
Unrealized (losses) gains on securities available for sale
Unrealized holding (loss) gain arising during year........ (2,527) (1,223) 2,861
Reclassification adjustment for realized gain included
in net income........................................ (106) (85) (2)
Minimum pension liability adjustment................... 18 208 (2,063)
------- ------- -------
Other comprehensive (loss) income before income tax benefit
(expense)................................................. (2,615) (1,100) 796
Income tax benefit (expense) related to other comprehensive
(loss) income............................................. 889 374 (271)
------- ------- -------
OTHER COMPREHENSIVE (LOSS) INCOME........................... (1,726) (726) 525
------- ------- -------
COMPREHENSIVE INCOME................................... $ 4,919 $ 6,479 $ 7,450
======= ======= =======

The accompanying notes are an integral part of these consolidated financial
statements.
29

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31
------------------------------
2004 2003 2002
-------- -------- --------
(DOLLARS IN THOUSANDS)

CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 6,645 $ 7,205 $ 6,925
Reconciliation of net income to net cash provided by
operations Provision for loan losses................... 735 1,455 1,025
Depreciation........................................... 1,552 1,703 1,647
Net amortization on investment securities.............. 1,558 1,592 1,006
Realized gain on sales of investment securities........ (106) (85) (2)
Amortization and impairment of mortgage servicing
rights............................................... 135 643 994
Increase in cash surrender value of life insurance..... (427) (608) (472)
Amortization of acquisition intangibles................ 93 94 94
Deferred income taxes (benefit)........................ 305 (41) (276)
Gain on sale of mortgage loans......................... (477) (2,091) (1,762)
Net change in loans held for sale...................... 2,453 11,168 (3,369)
Decrease in accrued interest receivable................ 219 363 64
Increase in other assets............................... (1,235) (1,008) (1,959)
Increase (decrease) in accrued interest and other
liabilities.......................................... 1,292 (526) 2,207
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES............ 12,742 19,864 6,122
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available-for-sale securities
Maturities, calls, and sales........................... 72,633 49,776 40,021
Purchases.............................................. (68,892) (64,710) (93,225)
Activity in held-to-maturity securities
Maturities and calls................................... 765 620 1,386
Net increase in loans.................................. (31,531) (31,615) (2,388)
Purchases of premises and equipment....................... (4,300) (3,018) (2,107)
Acquisition of title office............................... -- (36) (25)
Redemption (purchase) of cash value life insurance........ 288 389 (300)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES................ (31,037) (48,594) (56,638)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in noninterest bearing deposits... (2,024) 4,654 1,086
Net (decrease) increase in interest bearing deposits...... (1,807) 1,597 44,129
Net increase in borrowings................................ 12,929 260 5,897
Cash dividends............................................ (3,070) (2,881) (2,585)
Proceeds from issuance of common stock.................... 2,001 2,008 1,583
Common stock repurchases.................................. (192) (127) (619)
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES............ 7,837 5,511 49,491
DECREASE IN CASH AND CASH EQUIVALENTS....................... (10,458) (23,219) (1,025)
Cash and cash equivalents beginning of year................. 31,218 54,437 55,462
-------- -------- --------
CASH AND CASH EQUIVALENTS END OF YEAR................ $ 20,760 $ 31,218 $ 54,437
======== ======== ========
Supplemental cash flows information:
Federal income taxes paid................................. $ 2,569 $ 2,034 $ 2,774
Interest paid............................................. 10,420 12,450 15,312

The accompanying notes are an integral part of these consolidated financial
statements.
30

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE A -- BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION AND CONSOLIDATION:

The consolidated financial statements include the accounts of IBT Bancorp,
Inc. (the "Corporation"), a Financial Services Holding company, and its wholly
owned subsidiaries, Isabella Bank and Trust, Farmers State Bank, IBT Title and
Insurance Agency, Inc., IBT Loan Production, Financial Group Information
Services, and its majority owned subsidiaries, IBT Personnel, LLC (79%), and
IB&T Employee Leasing, LLC (79%). All intercompany transactions and accounts
have been eliminated.

NATURE OF OPERATIONS:

IBT Bancorp is a Financial Services Holding Company offering a wide array
of financial products and services in mid-Michigan. Its banking subsidiaries,
Isabella Bank and Trust and Farmers State Bank, offer banking services through
20 locations, 24-hour banking services locally and nationally through shared
automatic teller machines, and direct deposits to businesses, institutions, and
individuals. Lending services offered include commercial real estate loans and
lines of credit, agricultural loans, residential real estate loans, consumer
loans, student loans, and credit cards. Deposit services include interest and
noninterest bearing checking accounts, savings accounts, money market accounts,
and certificates of deposit. Other related financial products include trust
services, safe deposit box rentals, and credit life insurance. Active
competition, principally from other commercial banks, savings banks and credit
unions, exists in all of the Banks' principal markets. The Corporation's results
of operations can be significantly affected by changes in interest rates or
changes in the local economic environment.

IBT Title does business under the names Isabella County Abstract and Title,
Mecosta County Abstract and Title, IBT Title Clare, and Benchmark Title of
Greenville. IBT Title provides title insurance and abstract searches, and closes
real estate loans.

Financial Group Information Services provides network processing for all of
IBT Bancorp's subsidiaries.

IBT Loan Production is a mortgage loan origination company. Principal loan
products include 15 and 30 year fixed rate mortgage loans. All loans originated
are sold to Isabella Bank and Trust.

IBT Personnel and IB&T Employee Leasing provides payroll services, benefit
administration, and other human resource services to IBT Bancorp's subsidiaries.

USE OF ESTIMATES:

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for loan losses,
the valuation of mortgage servicing rights, and the valuation of real estate
acquired in connection with foreclosures or in satisfaction of loans. In
connection with the determination of the allowance for loan losses and the
carrying value of foreclosed real estate, management obtains independent
appraisals for significant properties.

SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK:

Most of the Corporation's activities conducted are with customers located
within the central Michigan area. A significant amount of its outstanding loans
are secured by real estate or are made to finance agricultural production. Other
than these types of loans, there is no significant concentration to any other
industry, customer or depositor.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CASH AND CASH EQUIVALENTS:

For purposes of the consolidated statements of cash flows, the Corporation
considers cash on hand, demand deposits due from banks, and federal funds sold
as cash and cash equivalents. Generally, federal funds are sold for a one day
period. The Corporation maintains deposit accounts in various financial
institutions which at times may exceed federally insured limits or are not
insured.

SECURITIES:

Management determines the appropriate classification of debt securities at
the time of purchase. Debt securities are classified as held to maturity when
the Corporation has the positive intent and ability to hold the securities to
maturity. Securities held to maturity are stated at amortized cost. Debt
securities not classified as held to maturity are classified as available for
sale and are stated at fair value with the unrealized gains and losses net of
taxes excluded from earnings and reported in other comprehensive income.

The amortized cost of debt securities classified as either held to maturity
or available for sale is adjusted for amortization of premiums and accretion of
discounts over the period to maturity and is computed using a method that
approximates the level yield method. Declines in the fair value of
held-to-maturity and available-for-sale securities below their cost that are
determined to be other than temporary are reflected in earnings as realized
losses. 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 the Corporation to retain its investment in the
issuer for a period of time sufficient to allow for any anticipated recovery in
fair value. Gains or losses on the sale of securities available-for-sale are
recorded on the trade date and are determined using the specific identification
method.

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 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 either doubtful,
substandard or special mention. For such loans that are also classified
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
management believes affect its estimate of probable losses inherent in the
portfolio. 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 the Corporation 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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 reason for the delay, the borrower's prior payment
record, and the amount of the shortfall in relation to the principal and
interest owned. 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, the Corporation does not separately
identify individual consumer and residential loans for impairment disclosures.

LOANS AND RELATED INCOME:

Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding
principal balance adjusted for any charge offs, the allowance for loans losses,
and any deferred fees or costs on originated loans. Interest income on loans is
accrued over the term of the loan based on the principal amount outstanding.
Loan origination fees and certain direct loan origination costs are capitalized
and recognized as a component of interest income over the term of the loan using
the constant yield method.

The accrual of interest on mortgage and commercial loans is discontinued at
the time the loan is 90 days or more past due unless the credit is well-secured
and in the process of collection. Credit card loans and other 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 nonaccrual
or charged off at an earlier date if collection of principal or interest is
considered doubtful.

The accrual of interest on impaired loans is discontinued when, in the
opinion of management, the borrower may be unable to meet payments as scheduled.
When the accrual of interest is discontinued, all uncollected accrued interest
is reversed against interest income. The interest income on such loans is
subsequently recognized only to the extent cash payment is received. Loans are
returned to accrual status when all principal and interest amounts contractually
due are brought current and future payments are reasonably assured. For impaired
loans not classified as nonaccrual, interest income continues to be accrued over
the term of the loan based on the principal amount outstanding.

MORTGAGE BANKING ACTIVITIES:

Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the aggregate. Gains or
losses on sales of such loans are recognized when control over the assets has
been surrendered, generally at the time of sale, and are determined by the
difference between the net sales proceeds and the unpaid principal balance of
the loans sold, adjusted for any yield differentials, servicing fees, and
servicing costs applicable to future years. Net unrealized losses, if any, are
recognized in a valuation allowance by charges to income.

The Corporation currently retains servicing on all loans originated and
sold into the secondary market. Originated mortgage servicing rights retained
are recognized for loans sold by allocating total costs incurred between the
loan and the servicing rights based on their relative fair values. Mortgage
servicing rights ("MSR") are reported in other assets and amortized into
noninterest income in proportion to, and over the period of, estimated net
servicing income. Servicing assets are evaluated for impairment based upon the
fair value of the rights as compared to amortized cost. Impairment is determined
by stratifying rights by predominant characteristics, such as interest rates and
terms. Fair value is determined using prices for similar assets with similar
characteristics, when available, or based upon discounted cash flows using
market-based assumptions. Impairment is recognized through a valuation allowance
for an individual stratum, to the extent that fair value is less than the
capitalized amount for the stratum.
33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Servicing fee income is earned for servicing loans for others. The fees are
based on a contracted percentage of the outstanding principal, or a fixed amount
per loan, and are recognized as revenue when received. The amortization of
mortgage servicing rights is netted against loan servicing fee income for
presentation purposes.

TRANSFERS OF FINANCIAL ASSETS:

Transfers of financial assets, including held for sale mortgage loans, as
described above, and participation loans are accounted for as sales when control
over the assets has been surrendered. Control over transferred assets is
determined to be surrendered when 1) the assets have been isolated from the
Banks, 2) the transferee obtains the right (free of conditions that constrain it
from taking advantage of the right) to pledge or exchange the transferred assets
and 3) the Banks do not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.

OTHER REAL ESTATE OWNED:

Real estate properties acquired through or in lieu of loan foreclosure are
initially recorded at the lower of the Bank's carrying amount or fair value less
estimated selling costs at the date of transfer. Any write-downs based on the
asset's fair value at the date of acquisition are charged to the allowance for
loan losses. After foreclosure, property held for sale is carried at the lower
of the new cost basis or fair value less costs to sell. Impairment losses on
property to be held and used are measured at the amount by which the carrying
amount of property exceeds its fair value. Costs of significant property
improvements are capitalized, whereas costs relating to holding property are
expensed. The portion of interest costs relating to development of real estate
is capitalized. Valuations are periodically performed by management, and any
subsequent write-downs are recorded as a charge to operations, if necessary, to
reduce the carrying value of a property to the lower of its cost or fair value
less costs to sell.

PREMISES AND EQUIPMENT:

Land is carried at cost. Premises and equipment are stated at cost less
accumulated depreciation. For financial reporting purposes, the provision for
depreciation is computed principally by the straight line method based upon the
useful lives of the assets which generally range from 5 to 30 years.
Maintenance, repairs and minor alterations are charged to current operations as
expenditures occur and major improvements are capitalized. Management annually
reviews these assets to determine whether carrying values have been impaired.

A summary of premises and equipment at December 31 follows:

2004 2003
------- -------

Land........................................................ $ 3,027 $ 2,617
Buildings and improvements.................................. 11,054 10,685
Equipment................................................... 20,614 17,146
------- -------
34,695 30,448
Less accumulated depreciation............................... 16,162 14,663
------- -------
NET PREMISES AND EQUIPMENT................................ $18,533 $15,785
======= =======

Depreciation expense was $1,552, $1,703 and $1,647 in 2004, 2003, and 2002,
respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RESTRICTED INVESTMENTS:

Included in other assets are restricted securities of $2,910 in 2004 and
$2,720 in 2003. Restricted securities include the stock of the Federal Reserve
Bank and the Federal Home Loan Bank and have no contractual maturity.

BANK OWNED LIFE INSURANCE:

The Corporation maintains life insurance policies on key members of
management. In the event of death of one of these individuals, the Corporation
would receive a specified cash payment equal to the face value of the policy.
Such policies are recorded at their cash surrender value. Increases in cash
surrender value in excess of premiums paid are reported as other noninterest
income.

ACQUISITION INTANGIBLES AND GOODWILL:

Isabella Bank and Trust previously acquired branch facilities and related
deposits in a business combination accounted for as a purchase. The acquisition
of the branches included amounts related to the valuation of customer deposit
relationships (core deposit intangibles). The core deposit intangible is
included in other assets and is being amortized on the straight line basis over
nine years, the expected life of the acquired relationship. Goodwill is included
in other assets and is not amortized but is evaluated for impairment at least
annually.

OFF-BALANCE-SHEET CREDIT RELATED FINANCIAL INSTRUMENTS:

In the ordinary course of business, the Corporation has entered into
commitments to extend credit, including commitments under credit card
arrangements, home equity lines of credit, commercial letters of credit, and
standby letters of credit. Such financial instruments are recorded only when
funded.

FEDERAL INCOME TAXES:

Federal income taxes are provided for the tax effects of transactions
reported in the consolidated financial statements and consist of taxes currently
due plus deferred income taxes. Deferred income taxes are recognized for
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Deferred income tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or deductible
when the assets or liabilities are recorded or settled. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. As changes in income tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes.

PER SHARE AMOUNTS:

Net income per share amounts are computed by dividing net income by the
weighted average number of shares outstanding. All per share amounts have been
adjusted for the stock dividend paid February 19, 2004. The weighted average
numbers of common shares outstanding were 4,858,714 in 2004; 4,790,986 in 2003;
and 4,721,714 in 2002.

RECLASSIFICATIONS:

Certain amounts reported in the 2003 and 2002 consolidated financial
statements have been reclassified to conform with the 2004 presentation.

RECENT ACCOUNTING PRONOUNCEMENTS:

In December 2004 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123R "Stock Based Compensation" which will
require the measurement of the cost of
35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

employee services received in exchange for an award of common stock options as
compensation expense in the consolidated statements of income using the fair
value method. Publicly held entities will begin reporting these costs in the
third quarter of 2005. The effect of implementing this new standard will not
initially impact reported earnings per share since the Corporation does not
currently use options as a component of employee compensation.

In 2003, the Emerging Issues Task force (EITF) released Issue No. 03-1, The
Meaning of Other-Than-Temporary Impairment and It's Applications to Certain
Investments, which provides guidance for reporting equity securities whose fair
value is not readily determinable (that is, equity securities that are outside
the scope of FASB Statement No. 115) if those securities are reported at cost.
Issue No. 03-1 refers to those equity securities as cost method investments.
Issue No. 03-1 describes the three steps a financial institution should take to
assess whether a cost method investment is impaired and, if it is, whether a
loss should be recognized. The recognition and measurement requirements of Issue
No. 03-1 were effective for the third quarter ended September 30, 2004. The
impact on the carrying value of the Corporation's investments in implementing
Issue No. 03-1 was not significant.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE B -- INVESTMENT SECURITIES

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

GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------

DECEMBER 31, 2004
Securities available for sale
U.S. Treasury and U.S. government
agencies.............................. $ 73,176 $ 149 $ (681) $ 72,644
States and political subdivisions....... 83,619 1,433 (420) 84,632
Commercial paper........................ 4,766 31 (43) 4,754
-------- ------ ------- --------
TOTAL................................. $161,561 $1,613 $(1,144) $162,030
======== ====== ======= ========
Securities held to maturity
U.S. Treasury and U.S. government
agencies.............................. $ 3 $ -- $ -- $ 3
States and political subdivisions....... 520 18 (4) 534
-------- ------ ------- --------
TOTAL................................. $ 523 $ 18 $ (4) $ 537
======== ====== ======= ========

GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------

DECEMBER 31, 2003
Securities available for sale
U.S. Treasury and U.S. government
agencies.............................. $ 88,802 $1,256 $(124) $ 89,934
States and political subdivisions....... 74,717 2,183 (244) 76,656
Commercial paper........................ 3,211 31 -- 3,242
-------- ------ ----- --------
TOTAL................................. $166,730 $3,470 $(368) $169,832
======== ====== ===== ========
Securities held to maturity
U.S. Treasury and U.S. government
agencies.............................. $ 9 $ -- $ -- $ 9
States and political subdivisions....... 1,303 37 -- 1,340
-------- ------ ----- --------
TOTAL................................. $ 1,312 $ 37 $ -- $ 1,349
======== ====== ===== ========

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

2004 2003 2002
------- ------- ------

Fair value of securities sold on the date of sale........ $45,044 $16,874 $2,066
Gross realized gains
US Treasury, US government agencies and comm. paper.... 129 85 2
Gross realized losses
US Treasury, US Government agencies and municipals..... 23 -- --

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following table shows the amortized cost and estimated fair value of
securities owned at December 31, 2004 by contractual maturity. Mortgage-backed
securities have been aggregated and disclosed separately rather than allocated
over several maturity groupings, since they lack a single maturity date and
because the borrowers retain the right to prepay the obligations. Expected
maturities will differ from contractual maturities because the issuers of
securities may have the right to prepay obligations without prepayment penalty.

AVAILABLE FOR SALE HELD TO MATURITY
-------------------- -----------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- -------- --------- -----

Due within one year or less.................... $ 29,707 $ 29,705 $195 $198
Due after 1 year thru 5 years.................. 80,607 80,635 200 215
Due after 5 years thru 10 years................ 26,380 26,910 125 121
Due after 10 years............................. 3,398 3,415 -- --
-------- -------- ---- ----
Subtotal..................................... 140,092 140,655 520 534
Mortgage backed securities..................... 21,469 21,365 3 3
-------- -------- ---- ----
TOTAL..................................... $161,561 $162,030 $523 $537
======== ======== ==== ====

Investment securities with carrying values of approximately $19,989 and
$7,087 were pledged to secure public deposits and for other purposes as
necessary or required by law at December 31, 2004 and 2003, respectively.

NOTE C -- LOANS

The Banks grant commercial, agricultural, consumer and residential loans to
customers situated primarily in Isabella, Gratiot, Mecosta, Southwestern
Midland, Western Saginaw, Northern Montcalm and Southern Clare counties in
mid-Michigan. The ability of the borrowers to honor their repayment obligations
is often dependent upon the real estate, agricultural, and general economic
conditions of this region. Substantially all of the consumer and residential
mortgage loans are secured by various items of property, while commercial loans
are secured primarily by real estate, business assets and personal guarantees; a
portion of loans are unsecured.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of the major classifications of loans is as follows:

DECEMBER 31
-------------------
2004 2003
-------- --------

Mortgage loans on real estate
Residential 1-4 family.................................... $152,706 $143,669
Commercial................................................ 96,739 91,001
Agricultural.............................................. 32,383 29,311
Construction.............................................. 35,384 24,287
Second mortgages.......................................... 17,143 16,783
Equity lines of credit.................................... 22,188 14,715
-------- --------
Total Mortgage loans................................... 356,543 319,766
Commercial & Agricultural loans
Commercial loans.......................................... 49,413 38,391
Agricultural Other........................................ 16,796 22,733
-------- --------
Total Commercial & Agricultural loans.................. 66,209 61,124
Consumer installment loans
Personal.................................................. 28,463 39,166
Credit cards.............................................. 1,680 1,803
-------- --------
Total Consumer installment loans....................... 30,143 40,969
Total loans................................................. 452,895 421,859
Less: Allowance for Loan Losses........................... (6,444) (6,204)
-------- --------
Loans, Net................................................ $446,451 $415,655
======== ========

A summary of changes in the allowance for loan losses follows:

YEAR ENDED DECEMBER 31:
--------------------------
2004 2003 2002
------ ------- -------

Balance at beginning of year............................. $6,204 $ 5,593 $ 5,471
Loans charged off...................................... (935) (1,140) (1,202)
Recoveries............................................. 440 296 299
Provision charged to income............................ 735 1,455 1,025
------ ------- -------
BALANCE AT END OF YEAR.............................. $6,444 $ 6,204 $ 5,593
====== ======= =======

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

2004 2003 2002
------ ------ ------

Impaired loans without a valuation allowance............... $1,786 $1,836 $1,085
Impaired loans with a valuation allowance.................. 448 2,787 1,639
------ ------ ------
Total impaired loans....................................... $2,234 $4,623 $2,724
====== ====== ======
Valuation allowance related to impaired loans.............. $ 304 $ 622 $ 103
====== ====== ======
Average investment in impaired loans....................... $2,949 $5,155 $2,968
====== ====== ======

Interest income recognized on impaired loans was not significant during any
of the three years ended December 31, 2004. No additional funds are committed to
be advanced in connection with impaired loans.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Certain directors and executive officers (including their families and
companies in which they have 10% or more ownership) of the Corporation and the
Banks were loan customers of the Banks. Total loans to these customers
aggregated $9,505 and $8,414 at December 31, 2004 and 2003, respectively. During
2004, $5,696 of new loans were made and repayments totaled $4,605.

Residential mortgage loans serviced for others are not included in the
accompanying consolidated balance sheets. The unpaid principal balances of
mortgages serviced for others was $253,282, $245,709 and $208,432 at December
31, 2004, 2003, and 2002 respectively. Servicing loans for others generally
consists of collecting mortgage payments, maintaining escrow accounts,
disbursing payments to investors and taxing authorities, and foreclosure
processing.

The following table summarizes the carrying value of mortgage servicing
rights included in other assets as of December 31:

2004 2003 2002
------- ------- ------

Balance at beginning of year............................. $ 1,714 $ 511 $ 402
Mortgage servicing rights capitalized.................... 2,633 3,369 1,632
Accumulated amortization................................. (2,279) (1,955) (885)
Impairment valuation allowance........................... (22) (211) (638)
------- ------- ------
BALANCE AT END OF YEAR................................. $ 2,046 $ 1,714 $ 511
======= ======= ======

Activity in the impairment valuation allowance consisted of reductions of
$189 and $427 for the years ended December 31, 2004 and 2003, respectively while
in 2002 additions amounted to $467.

NOTE D -- FAIR VALUES OF FINANCIAL INSTRUMENTS

The fair value of a financial instrument is the current amount that would
be exchanged between willing parties, other than in a forced liquidation. The
Corporation utilizes quoted market prices, where available, to compute the fair
value of its financial instruments. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Certain financial instruments and all
nonfinancial instruments are excluded from the disclosure requirements. These
include, among other elements, the estimated earning power of core deposit
accounts, the trained work force, customer goodwill and similar items.
Accordingly, the aggregate of the fair value amounts presented are not
necessarily indicative of the underlying value of the Corporation.

The following methods and assumptions were used by the Corporation in
estimating fair value disclosures for financial instruments.

CASH AND CASH EQUIVALENTS:

The carrying amounts reported in the balance sheets for cash and demand
deposits due from banks and federal funds sold approximate those assets' fair
value.

INVESTMENT SECURITIES:

Fair values for investment securities are based on quoted market prices,
where available. If quoted market prices are unavailable, fair values are based
on quoted market prices of comparable instruments.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

MORTGAGE LOANS HELD FOR SALE:

Fair values are based on commitments on hand from investors or prevailing
market prices.

LOANS:

Fair values for variable rate loans that reprice at least quarterly and
have no significant change in credit risk are assumed to equal recorded book
value. Fixed rate loans are valued using present value discounted cash flow
techniques. The discount rate used in these calculations was the U.S. government
bond rate for securities with similar maturities adjusted for servicing costs,
credit loss, and prepayment risk.

DEPOSIT LIABILITIES:

Demand, savings, and money market deposits have no stated maturities and
are payable on demand; thus their estimated fair value is equal to their
recorded book balance. Fair values for variable rate certificates of deposit
approximate their recorded book balance. Fair values for fixed rate certificates
of deposit are determined using discounted cash flow techniques that apply
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.

BORROWED FUNDS:

The carrying amounts of federal funds purchased and borrowings under
repurchase agreements approximate their fair value. The fair values of other
borrowings are estimated using discounted cash flow analyses based on the
Corporation's current incremental borrowing rates for similar types of borrowing
arrangements.

ACCRUED INTEREST:

The carrying amounts of accrued interest approximate fair value.

OFF-BALANCE-SHEET CREDIT-RELATED INSTRUMENTS:

Fair values for off-balance-sheet lending commitments are based on fees
currently charged to enter into similar agreements, taking into consideration
the remaining terms of the agreements and the counterparties' credit standings.
The Corporation does not charge fees for lending commitments; thus it is not
practicable to estimate the fair value of these instruments.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following sets forth the estimated fair value and recorded carrying
values of the Corporation's financial instruments as of December 31:

2004 2003
--------------------- ---------------------
ESTIMATED CARRYING ESTIMATED CARRYING
FAIR VALUE VALUE FAIR VALUE VALUE
---------- -------- ---------- --------

ASSETS
Cash and demand deposits due from banks............ $ 20,760 $ 20,760 $ 25,918 $ 25,918
Federal funds sold................................. 0 0 5,300 5,300
Investment securities.............................. 162,567 162,553 171,181 171,144
Mortgage loans available for sale.................. 2,334 2,339 4,343 4,315
Net loans.......................................... 412,175 446,451 417,984 415,655
Accrued interest receivable........................ 4,315 4,315 4,534 4,534
Mortgage servicing rights.......................... 2,848 2,046 2,565 1,714

LIABILITIES
Deposits with no stated maturities................. $329,612 $329,612 $329,029 $329,029
Deposits with stated maturities.................... 220,533 234,264 245,239 238,678
Borrowed funds..................................... 26,466 30,982 19,118 18,053
Accrued interest payable........................... 702 702 830 830

NOTE E -- FEDERAL INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Corporation's deferred tax assets and liabilities, included in other assets,
as of December 31 are as follows:

2004 2003
------ ------

Deferred tax assets
Allowance for loan losses................................. $1,411 $1,379
Deferred directors' fees.................................. 886 735
Employee benefit plans.................................... 756 755
Core deposit premium and acquisition expenses............. 107 192
Net unrealized loss on minimum pension liability.......... 625 631
Other..................................................... 63 186
------ ------
TOTAL DEFERRED TAX ASSETS.............................. 3,848 3,878
------ ------
Deferred tax liabilities
Premises and equipment.................................... 745 494
Accretion on securities................................... 19 32
Net unrealized gain on available-for-sale securities...... 160 1,055
Other..................................................... 181 138
------ ------
TOTAL DEFERRED TAX LIABILITIES......................... 1,105 1,719
------ ------
NET DEFERRED TAX ASSETS.............................. $2,743 $2,159
====== ======

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

2004 2003 2002
------ ------ ------

Current.................................................... $1,573 $2,076 $2,562
Deferred (benefit)......................................... 305 (41) (276)
------ ------ ------
PROVISION FOR FEDERAL INCOME TAXES....................... $1,878 $2,035 $2,286
====== ====== ======

The reconciliation of the provision for federal income taxes and the amount
computed at the federal statutory tax rate of 34% of income before federal
income taxes is as follows for the year ended December 31:

2004 2003 2002
------- ------- ------

Income taxes at statutory rate........................... $ 2,898 $ 3,142 $3,132
Effect of nontaxable income and nondeductible expenses... (1,020) (1,107) (846)
------- ------- ------
PROVISION FOR FEDERAL INCOME TAXES..................... $ 1,878 $ 2,035 $2,286
======= ======= ======

NOTE F -- BENEFIT PLANS

DEFINED BENEFIT PENSION PLAN

The Corporation has a defined benefit pension plan covering substantially
all of its employees. The benefits are based on years of service and the
employees' average compensation over their best five years of service. The
funding policy is to contribute annually the maximum amount that can be deducted
for federal income tax purposes. Contributions are intended to provide not only
for benefits attributed to services to date but also for those expected to be
earned in the future.

The Corporation uses a January 1, 2004 measurement date for this pension
plan.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Changes in the projected benefit obligation and plan assets during each
year, the funded status of the plan and a reconciliation to the amount
recognized in the Corporation's consolidated balance sheets are summarized as
follows at December 31:

2004 2003 2002
------- ------- -------

Change in projected benefit obligation
Benefit obligation January 1.............................. $ 8,083 $ 6,949 $ 5,870
Service cost........................................... 410 391 297
Interest cost.......................................... 518 463 425
Actuarial loss......................................... 144 687 634
Benefits paid.......................................... (372) (407) (277)
------- ------- -------
BENEFIT OBLIGATION, DECEMBER 31...................... $ 8,783 $ 8,083 $ 6,949
======= ======= =======
Change in plan assets
Fair value of plan assets, January 1...................... $ 5,427 $ 4,830 $ 5,259
Investment return (loss)............................... 348 479 (509)
Corporation contribution............................... 908 525 357
Benefits paid.......................................... (372) (407) (277)
------- ------- -------
FAIR VALUE OF PLAN ASSETS, DECEMBER 31............... $ 6,311 $ 5,427 $ 4,830
======= ======= =======
Reconciliation of funded status
Funded status............................................. $(2,472) $(2,656) $(2,119)
Unrecognized net transition asset......................... -- -- (22)
Unrecognized prior service cost........................... 76 94 113
Unrecognized net loss from experience different than that
assumed and effects of changes in assumptions.......... 4,146 4,254 3,843
Additional minimum pension liability...................... (1,915) (1,951) (2,176)
------- ------- -------
ACCRUED BENEFIT COST................................. $ (165) $ (259) $ (361)
======= ======= =======

The accumulated benefit obligation was $6,476, and $5,686 at December 31,
2004, and 2003, respectively, resulting in a minimum pension liability at those
dates of $165 and $259.

An adjustment to record the additional minimum pension liability as of
December 31, 2004 and 2003 was established by the recording of an intangible
pension asset of $76 and $94, and a credit to other comprehensive income of $16
and $208 in 2004 and 2003, respectively.

The net amount recognized in the consolidated balance sheets consists of
the following accounts at December 31:

PENSION BENEFITS
-----------------
2004 2003
------- -------

Accrued benefit cost........................................ $ (165) $ (259)
Intangible asset............................................ 76 94
Accumulated other comprehensive loss........................ 1,839 1,855
------ ------
Net amount recognized....................................... $1,750 $1,690
====== ======

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

PENSION
BENEFITS
-----------
2004 2003
---- ----

Decrease in minimum pension liability included as a
reduction of other comprehensive loss..................... $18 $208
=== ====

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

2004 2003 2002
----- ----- -----

Service cost on benefits earned for services rendered during
the year.................................................. $ 518 $ 391 $ 297
Interest cost on projected benefit obligation............... 501 463 425
Expected return on plan assets.............................. (430) (390) (409)
Amortization of unrecognized transition asset............... -- (22) (22)
Amortization of unrecognized prior service cost............. 18 18 18
Amortization of unrecognized actuarial net loss............. 213 188 113
----- ----- -----
NET PENSION EXPENSE....................................... $ 820 $ 648 $ 422
===== ===== =====

Actuarial assumptions used in determining the projected benefit obligation
are as follows for the year ended December 31:

2004 2003 2002
----- ----- -----

Weighted average discount rate.............................. 6.25% 6.25% 6.75%
Rate of increase in future compensation..................... 4.50% 4.50% 4.50%
Expected long-term rate of return........................... 8.00% 8.00% 8.00%

The actual weighted average assumptions used in determining the net
periodic pension costs are as follows for the year ended December 31:

2004 2003 2002
----- ----- -----

Discount rate............................................... 6.75% 6.75% 7.25%
Expected long-term return on plan assets.................... 8.00% 8.00% 8.00%
Rate of compensation increase............................... 4.50% 4.50% 4.50%

The discount rate was unchanged in 2004 from 2003. The rate decreased in
2003 to 6.75% from 7.25% in 2002 to reflect lower rates of return on high
quality fixed income investments. The expected long term rate of return is based
on the Corporation's actual recommended rate. The factors used to establish the
rate include historical plan performance, comparison of rates used by similar
plans with similar asset allocations, and historical performance of long-term
investments.

The Corporation's pension plan weighted-average asset allocations by asset
category are as follows at December 31:

ASSET CATEGORY 2004 2003
-------------- ------- -------

Equity securities........................................... 51.5% 55.2%
Debt securities............................................. 33.9% 21.4%
Other....................................................... 14.6% 23.4%
------- -------
TOTAL....................................................... 100.00% 100.00%
======= =======

Debt securities include certificates of deposit with the Banks in the
amounts of $1,082 (17% of total plan assets) and $1,000 (18% of total plan
assets) at December 31, 2004 and 2003, respectively. Also included in other is
$881 (14% of total plan assets) of funds in a money market account with Isabella
Bank and Trust as of December 31, 2004.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Corporation's investment policy for the benefit plan includes asset
holdings in publicly traded equities, U.S. Government agency obligations and
investment grade corporate and municipal bonds. The policy restricts equity
investment to less than 20% of equity investments in any sector and to less than
4% of plans assets in any one company. The Corporation's weighted asset
allocations in 2004 and 2003 were as follows:

Equity securities........................................... 55% to 65%
Debt securities............................................. 25% to 35%
Real estate................................................. 0.00%
Other....................................................... 15%

The plan's investment in equity securities in 2004 were less than the 55%
minimum established in the Corporation's investment policy as a result of a $640
contribution to the plan on December 29, 2004. The contribution was in a money
market fund, which is included in other; these funds were substantially re-
invested by January 15, 2005.

The asset mix, the sector weighting of equity investments, and debt issues
to hold are based on a third party investment advisor retained by the
Corporation to manage the plan. The Corporation reviews the performance of the
advisor no less than annually.

The Corporation expects to contribute approximately $815 to the pension
plan in 2005.

Estimated future benefit payments, which reflect expected future service,
as appropriate, are as follows for the next ten years:

YEAR AMOUNT
---- ------

2005...................................................... $ 314
2006...................................................... 315
2007...................................................... 321
2008...................................................... 329
2009...................................................... 338
Years 2010 -- 2014.......................................... 2,313

OTHER EMPLOYEE BENEFIT PLANS

The Corporation maintains a nonqualified supplementary retirement plan for
officers to provide supplemental retirement benefits and death benefits to each
participant. Insurance policies, designed primarily to fund death benefits, have
been purchased on the life of each participant with the Corporation as the sole
owner and beneficiary of the policies. Expenses related to this program for
2004, 2003, and 2002 were $65, $388, and $41, respectively, and are being
recognized over the participants' expected years of service.

The Corporation maintains a non-leveraged employee stock ownership plan
(ESOP) and a profit sharing plan which cover substantially all of its employees.
Contributions to the Plans are discretionary and are approved by the Board of
Directors and recorded as compensation expense. Compensation expense related to
the Plans for 2004, 2003, and 2002 was $11, $122, and $196, respectively. Total
shares outstanding related to the ESOP at December 31, 2004 and 2003 were
166,155 and 150,583, respectively, and were included in the computation of
dividends and earnings per share in each of the respective years.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE G -- DEPOSITS

At December 31, 2004, the scheduled maturities of time deposits for each of
the next five years and thereafter are as follows:

YEAR AMOUNT
---- --------

2005...................................................... $119,122
2006...................................................... 47,183
2007...................................................... 34,721
2008...................................................... 17,600
2009...................................................... 12,788
Thereafter.................................................. 2,850

NOTE H -- BORROWED FUNDS

Borrowed funds consist of the following obligations at December 31:

2004 2003
------- -------

Federal Home Loan Bank advances............................. $27,312 $16,337
Federal Funds purchased..................................... 2,974 --
Securities sold under agreements to repurchase.............. 530 1,500
Unsecured note payable...................................... 166 216
------- -------
$30,982 $18,053
======= =======

The Federal Home Loan Bank borrowings are collateralized by a blanket lien
on all qualified 1 to 4 family residential mortgage loans and U.S. Treasury and
government agency securities. Advances are also secured by FHLB stock owned by
the Banks.

The maturity and weighted average interest rates of FHLB advances follows
at December 31:

2004
--------------
AMOUNT RATE
------- ----

Fixed rate advances due 2006................................ $ 5,500 2.76%
Two year putable advance due 2006........................... 5,000 5.08
Fixed rate advances due 2007................................ 4,000 3.64
Fixed rate advances due 2009................................ 3,500 3.66
Fixed rate advances due 2010................................ 4,312 5.39
One year putable advance due 2010........................... 3,000 4.98
Fixed rate advance due 2012................................. 2,000 4.90
------- ----
TOTAL ADVANCES............................................ $27,312 4.24%
======= ====

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2003
--------------
AMOUNT RATE
------- ----

Fixed rate advance due 2004................................. $ 1,000 5.05%
Two year putable advance due 2006........................... 5,000 5.08
Fixed rate advance due 2009................................. 1,000 4.19
Fixed rate advance due 2010................................. 2,337 6.62
One year putable advance due 2010........................... 3,000 4.98
Fixed rate advance due 2010................................. 2,000 3.97
Fixed rate advance due 2012................................. 2,000 4.90
------- ----
TOTAL ADVANCES............................................ $16,337 5.07%
======= ====

Securities sold under agreements to repurchase, which are classified as
secured borrowings, generally mature within one to four days from the
transaction date. Securities sold under agreements to repurchase are reflected
at the amount of cash received in connection with the transaction. The U.S.
government agency securities underlying the agreements have a carrying value and
a fair value of approximately $1,017 and $502 at December 31, 2004 and 2003,
respectively. Such securities remain under the control of the Corporation. The
Corporation may be required to pledge additional collateral based on the fair
value of the underlying securities.

The unsecured note payable has an imputed interest rate of 4.16% and is
payable in annual installments of $60,000, including interest, through July
2007.

NOTE I -- OTHER NON-INTEREST EXPENSES

A summary of expenses included in Other Non-Interest Expenses that exceed
1% of total income are as follows for the year ended December 31:

2004 2003 2002
------ ------ ------

Director fees.............................................. $ 496 $ 459 $ 395
Marketing and advertising.................................. 522 538 556
SOX 404 compliance......................................... 734 0 0
Other, not individually significant........................ 3,737 4,047 4,000
------ ------ ------
TOTAL OTHER.............................................. $5,489 $5,044 $4,951
====== ====== ======

NOTE J -- FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The Corporation is party to financial instruments with off-balance-sheet
risk. These instruments are entered into in the normal course of business to
meet the financing needs of its customers. These financial instruments, which
include commitments to extend credit and standby letters of credit, involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amounts recognized in the consolidated balance sheets. The contract or notional
amounts of these instruments reflect the extent of involvement the Corporation
has in a particular class of financial instrument.

The Corporation's exposure to credit loss in the event of nonperformance by
the other party to the financial instruments for commitments to extend credit
and standby letters of credit is represented by the contractual notional amount
of those instruments. The Corporation uses the same credit policies in deciding
to make these commitments as it does for extending loans to customers.

Commitments to extend credit, which totaled $67,590 and $58,448 at December
31, 2004 and 2003, respectively, are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have variable interest rates, fixed expiration dates, or other

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

termination clauses and may require the payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.

Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support private borrowing arrangements,
including commercial paper, bond financing, and similar transactions. At
December 31, 2004 and 2003 the Corporation had a total of $991 and $715,
respectively, in outstanding standby letters of credit.

Generally, these commitments to extend credit and letters of credit mature
within one year. The credit risk involved in these transactions is essentially
the same as that involved in extending loans to customers. The Corporation
evaluates each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Corporation upon the
extension of credit, is based on management's credit evaluation of the borrower.
Collateral held varies but may include accounts receivable, inventory, property,
plant and equipment, and other income producing commercial properties.

Isabella Bank and Trust sponsors the IBT Foundation (the "Foundation"),
which is a nonprofit entity formed for the purpose of distributing charitable
donations to recipient organizations generally located in the communities
serviced by Isabella Bank and Trust. The Bank periodically makes charitable
contributions in the form of cash transfers to the Foundation. The Foundation is
administered by members of the Isabella Bank and Trust Board of Directors. The
assets and transactions of the Foundation are not included in the consolidated
financial statements of IBT Bancorp, Inc. Donations made to the Foundation by
Isabella Bank and Trust included in noninterest expense were $27, $870 and $649
in 2004, 2003 and 2002, respectively. The assets of the Foundation as of
December 31, 2004 approximated $1.7 million.

NOTE K -- COMMITMENTS AND OTHER MATTERS

Banking regulations require banks to maintain cash reserve balances in
currency or as deposits with the Federal Reserve Bank. The Corporation's
requirement was approximately $849 at December 31, 2004, and $12,687 at December
31, 2003.

Banking regulations also limit the transfer of assets in the form of
dividends, loans, or advances from the subsidiary Banks to the Corporation. At
December 31, 2004, substantially all of the subsidiary Banks' assets were
restricted from transfer to the Corporation in the form of loans or advances.
Consequently, bank dividends are the principal source of funds for the
Corporation. Payment of dividends without regulatory approval is limited to the
current years retained net income plus retained net income for the preceding two
years, less any required transfers to capital surplus. At January 1, 2005, the
amount available for dividends without regulatory approval was approximately
$4,667.

The Corporation maintains a self-funded medical plan under which the
Corporation is responsible for the first $50 per year of claims made by a
covered individual. Medical claims are subject to a lifetime maximum of $3,000
per covered individual. Expenses are accrued based on estimates of the aggregate
liability for claims incurred and the Corporation's experience. Expenses were
$1,184 in 2004, $1,532 in 2003 and $1,370 in 2002.

The Corporation offers a dividend reinvestment and employee stock purchase
plan. The dividend reinvestment plan allows shareholders to purchase previously
unissued IBT Bancorp common shares. The employee stock purchase plan allows
employees to purchase IBT Bancorp common stock through payroll deduction. The
number of shares authorized for issuance under these plans are 280,000 with
203,301 shares unissued at December 31, 2004. During 2004, 2003 and 2002, 57,388
shares were issued for $2,001, 70,340 shares were issued for $2,008, and 52,473
shares were issued for $1,524, respectively, in cash pursuant to these plans.

The subsidiary Banks of the Corporation have obtained approval to borrow up
to $40,000 from the Federal Home Loan Bank (FHLB) of Indianapolis. Under the
terms of the agreement, the Banks may obtain

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

advances at the stated rate at the time of the borrowings. The Banks have agreed
to pledge eligible mortgage loans and U.S. Treasury and governmental agencies as
collateral for any such borrowings.

Certain directors and executive officers of the Corporation, the Banks and
their related interests were deposit customers of the Banks. Total deposits of
these customers aggregate approximately $5,629 and $6,380 at December 31, 2004
and December 31, 2003, respectively. In addition, the IBT Bancorp's defined
benefit plan and the Employee Stock Ownership Plan (Note G) held certificates of
deposit with the Banks aggregating $1,083 and $475, and $100 and $831,
respectively at December 31, 2004 and 2003.

NOTE L -- OPERATING SEGMENTS

The Corporation's reportable segments are based on legal entities that
account for at least 10% of operating results. The accounting policies are the
same as those discussed in Note A to the Consolidated Financial Statements. The
Corporation evaluates performance based principally on net income and asset
quality of the respective segments. A summary of selected financial information
for the Corporation's reportable segments follows:

ALL OTHERS
ISABELLA BANK FARMERS (INCLUDING
AND TRUST STATE BANK PARENT) TOTAL
------------- ---------- ---------- --------

2004
Total assets........................... $542,759 $125,350 $ 9,925 $678,034
Interest income........................ 26,436 7,258 127 33,821
Net interest income.................... 18,247 4,919 198 23,364
Provision for loan losses.............. 550 185 -- 735
Net income (loss)...................... 6,073 1,345 (773) 6,645
2003
Total assets........................... $527,805 $127,124 $ 9,150 $664,079
Interest income........................ 28,013 7,797 168 35,978
Net interest income.................... 18,295 5,005 228 23,528
Provision for loan losses.............. 570 885 -- 1,455
Net income (loss)...................... 6,415 1,008 (218) 7,205
2002
Total assets........................... $515,831 $126,850 $10,036 $652,717
Interest income........................ 29,689 8,353 119 38,161
Net interest income.................... 17,559 5,135 211 22,905
Provision for loan losses.............. 650 375 -- 1,025
Net income............................. 5,516 1,206 203 6,925

NOTE M -- REGULATORY CAPITAL MATTERS

The Corporation (on a consolidated basis) and its subsidiary banks,
Isabella Bank and Trust and Farmers State Bank ("Banks") are subject to various
regulatory capital requirements administered by their primary regulator, the
Federal Reserve Bank. Failure to meet minimum capital requirements can initiate
mandatory and/or discretionary actions by the Federal Reserve. These actions
could have a material effect on the Corporation's and Banks' financial
statements. Under the Federal Reserve's capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Corporation and the Banks
must meet specific capital guidelines that include quantitative measures of
their assets, certain off-balance-sheet items, and capital, as calculated under
regulatory accounting standards. The Banks' required capital is also subject to

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

regulatory qualitative judgment regarding the Banks' interest rate risk exposure
and credit risk. Prompt corrective action provisions are not applicable to bank
holding companies.

Measurements established by regulation to ensure capital adequacy require
the Corporation and the Banks to maintain minimum total capital to risk weighted
assets (as defined in the regulations), Tier 1 capital to risk weighted assets
(as defined), and Tier 1 capital to average assets (as defined). Management
believes, as of December 31, 2003 and 2002, that the Corporation and the Banks
meet all capital adequacy requirements to which they are subject.

As of December 31, 2004, the most recent notifications from the Federal
Reserve Bank categorized the Banks as well capitalized. To be categorized as
well capitalized, a bank must maintain total risk based capital, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the following tables.
There have been no conditions or events since the notifications that management
believes has changed the Banks' categories.

The Corporation's and each Bank's actual capital amounts (in thousands) and
ratios are also presented in the table.

MINIMUM TO BE
WELL CAPITALIZED
UNDER PROMPT
MINIMUM CAPITAL CORRECTIVE ACTION
ACTUAL REQUIREMENTS PROVISIONS
--------------- ---------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ------ -------- ------

AS OF DECEMBER 31, 2004
Total capital to risk weighted assets
Isabella Bank and Trust.............. $47,720 13.1% $29,042 8.0% $36,303 10.0%
Farmers State Bank................... 14,033 15.5 7,242 8.0 9,052 10.0
Consolidated......................... 75,340 16.4 36,764 8.0 N/A N/A
Tier 1 capital to risk weighted assets
Isabella Bank and Trust.............. 43,351 11.9 14,521 4.0 21,782 6.0
Farmers State Bank................... 12,890 14.2 3,621 4.0 5,431 6.0
Consolidated......................... 69,587 15.1 18,382 4.0 N/A N/A
Tier 1 capital to average assets
Isabella Bank and Trust.............. 43,351 8.1 21,536 4.0 26,920 5.0
Farmers State Bank................... 12,890 10.4 4,970 4.0 6,213 5.0
Consolidated......................... 69,587 10.4 26,866 4.0 N/A N/A
AS OF DECEMBER 31, 2003
Total capital to risk weighted assets
Isabella Bank and Trust.............. $43,727 13.1% $26,749 8.0% $33,436 10.0%
Farmers State Bank................... 13,320 14.6 7,289 8.0 9,111 10.0
Consolidated......................... 68,638 15.9 34,456 8.0 N/A N/A
Tier 1 capital to risk weighted assets
Isabella Bank and Trust.............. 39,734 11.9 13,375 4.0 20,062 6.0
Farmers State Bank................... 12,168 13.4 3,645 4.0 5,467 6.0
Consolidated......................... 63,244 14.7 17,228 4.0 N/A N/A
Tier 1 capital to average assets
Isabella Bank and Trust.............. 39,734 7.6 21,043 4.0 26,304 5.0
Farmers State Bank................... 12,168 9.6 5,062 4.0 6,328 5.0
Consolidated......................... 63,244 9.7 26,227 4.0 N/A N/A

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE N -- PARENT COMPANY ONLY FINANCIAL INFORMATION

CONDENSED BALANCE SHEET

DECEMBER 31
-----------------
2004 2003
------- -------

ASSETS
Cash on deposit at subsidiary Banks....................... $ 7,219 $ 7,592
Securities available for sale............................. 3,703 2,133
Investments in subsidiaries............................... 63,999 61,775
Premises and equipment.................................... 103 117
Other assets.............................................. 2,411 1,444
------- -------
TOTAL ASSETS........................................... $77,435 $73,061
======= =======

LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities......................................... $ 4,841 $ 4,126
Shareholders' equity...................................... 72,594 68,935
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $77,435 $73,061
======= =======

CONDENSED STATEMENTS OF INCOME

YEAR ENDED DECEMBER 31
------------------------
2004 2003 2002
------ ------ ------

Income
Dividends from subsidiaries.............................. $3,500 $3,825 $3,325
Interest income.......................................... 139 128 122
Management fee and other................................. 643 423 292
------ ------ ------
TOTAL INCOME.......................................... 4,282 4,376 3,739
Expenses................................................... 2,065 1,114 824
------ ------ ------
Income before income tax benefit and equity in
undistributed earnings of subsidiaries................ 2,217 3,262 2,915
Federal income tax benefit............................... 470 218 152
------ ------ ------
2,687 3,480 3,067
Undistributed earnings of subsidiaries..................... 3,958 3,725 3,858
------ ------ ------
NET INCOME............................................ $6,645 $7,205 $6,925
====== ====== ======

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

CONDENSED STATEMENTS OF CASH FLOWS

YEAR ENDED DECEMBER 31
---------------------------
2004 2003 2002
------- ------- -------

OPERATING ACTIVITIES
Net income................................................ $ 6,645 $ 7,205 $ 6,925
Adjustments to reconcile net income to cash provided by
operations
Undistributed earnings of subsidiaries................. (3,958) (3,725) (3,858)
Net amortization of securities......................... 12 -- --
(Increase) decrease in interest receivable............. (4) (2) (2)
(Increase) decrease in other assets.................... (1,031) 717 (1,947)
Increase in accrued expenses........................... 809 675 389
Provision for depreciation............................. 21 19 20
Deferred income taxes (benefit)........................ (13) (348) 328
------- ------- -------
NET CASH PROVIDED BY OPERATIONS................... 2,481 4,541 1,855
INVESTING ACTIVITIES
Proceeds from the maturities of investments securities
available for sale..................................... 260 185 175
Purchases of investment securities available for sale..... (1,846) (820) (1,080)
Investment in subsidiaries................................ -- 34 (495)
Purchases of equipment and premises....................... (7) (38) (5)
------- ------- -------
NET CASH (USED IN) PROVIDED BY INVESTING
ACTIVITIES...................................... (1,593) (639) (1,405)
FINANCING ACTIVITIES
Cash dividends............................................ (3,070) (2,881) (2,585)
Issuance of common stock.................................. 2,001 2,008 1,583
Repurchase of common stock................................ (192) (127) (619)
------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES............. (1,261) (1,000) (1,621)
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (373) 2,902 (1,171)
Cash and cash equivalents at beginning of year.............. 7,592 4,690 5,861
------- ------- -------
CASH AND CASH EQUIVALENTS AT YEAR END............. $ 7,219 $ 7,592 $ 4,690
======= ======= =======

NOTE O -- GOODWILL AND OTHER INTANGIBLE ASSETS

Included in other assets on the accompanying consolidated balance sheets
are the following amounts as of December 31:

2004 2003
------ ------

Branch acquisition goodwill................................. $2,036 $2,036
Title company goodwill...................................... 1,100 1,100
------ ------
Total goodwill.............................................. 3,136 3,136
Core deposit intangibles, net............................... 211 304
------ ------
$3,347 $3,440
====== ======

The core deposit intangibles are being amortized on a straight-line basis
over nine years. Management periodically reviews this asset to determine whether
the carrying value has been impaired.

IBT BANCORP FINANCIAL REVIEW
(ALL DOLLARS IN THOUSANDS)

The following is management's discussion and analysis of the financial
condition and results of operations for IBT Bancorp (the Corporation). This
discussion and analysis is intended to provide a better understanding of the
financial statements and statistical data included elsewhere in the Annual
Report.

CRITICAL ACCOUNTING POLICIES:

The Corporation's significant accounting policies are set forth in Note A
of the Consolidated Financial Statements. Of these significant accounting
policies, the Corporation considers its policies regarding the allowance for
loan losses and servicing assets to be its most critical accounting policies.

The allowance for loan losses requires management's most subjective and
complex judgment. Changes in economic conditions can have a significant impact
on the allowance for loan losses and therefore the provision for loan losses and
results of operations. The Corporation has developed appropriate policies and
procedures for assessing the adequacy of the allowance for loan losses,
recognizing that this process requires a number of assumptions and estimates
with respect to its loan portfolio. The Corporation's assessments may be
impacted in future periods by changes in economic conditions, the impact of
regulatory examinations, and the discovery of information with respect to
borrowers that is not known to management at the time of the issuance of the
consolidated financial statements. For additional discussion concerning the
Corporation's allowance for loan losses and related matters, see Provision for
Loan Losses and Allowance for Loan Losses.

Servicing assets are evaluated for impairment based upon the fair value of
the rights as compared to amortized cost. Impairment is determined by
stratifying rights by predominant characteristics, such as interest rates and
terms. Fair value is determined using prices for similar assets with similar
characteristics, when available, or based upon discounted cash flows using
market-based assumptions. Impairment is recognized through a valuation allowance
for an individual stratum, to the extent that fair value is less than the
capitalized amount for the stratum.

TABLE 1. DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS' EQUITY
INTEREST RATE AND INTEREST DIFFERENTIAL

The following schedules present the daily average amount outstanding for
each major category of interest earning assets, nonearning assets, interest
bearing liabilities, and noninterest bearing liabilities. This schedule also
presents an analysis of interest income and interest expense for the periods
indicated. All interest income is reported on a fully taxable equivalent (FTE)
basis using a 34% federal income tax rate. Nonaccruing loans, for the purpose of
the following computations, are included in the average loan amounts
outstanding. Federal Reserve and Federal Home Loan Bank Equity holdings are
included in Other Investments.

2004 2003 2002
--------------------------- --------------------------- ---------------------------
TAX AVERAGE TAX AVERAGE TAX AVERAGE
AVERAGE EQUIVALENT YIELD/ AVERAGE EQUIVALENT YIELD/ AVERAGE EQUIVALENT YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- ---------- ------- -------- ---------- ------- -------- ---------- -------

INTEREST EARNING ASSETS
Loans.......................... $437,438 $27,801 6.36% $404,953 $29,196 7.21% $396,234 $31,554 7.96%
Taxable investment
securities................... 114,806 3,696 3.22 123,927 4,437 3.58 94,383 4,197 4.45
Nontaxable investment
securities................... 55,882 3,206 5.74 49,531 3,099 6.26 45,663 2,864 6.27
Federal funds sold............. 4,516 30 0.66 16,311 193 1.18 26,364 423 1.60
Other investments.............. 2,978 178 5.98 2,857 151 5.29 2,735 165 6.03
-------- ------- ---- -------- ------- ---- -------- ------- ----
TOTAL EARNING ASSETS......... 615,620 34,911 5.67 597,579 37,076 6.20 565,379 39,203 6.93
NONEARNING ASSETS
Allowance for loan losses...... (6,584) (5,946) (5,621)
Cash and due from banks........ 23,831 26,840 24,236
Premises and equipment......... 18,147 15,646 14,983
Accrued income and other
assets....................... 24,143 25,204 24,530
-------- -------- --------
TOTAL ASSETS................. $675,157 $659,323 $623,507
======== ======== ========
INTEREST BEARING LIABILITIES
Interest bearing demand
deposits..................... $106,471 569 0.53 $113,206 1,057 0.93 $ 98,478 1,406 1.43
Savings deposits............... 157,819 872 0.55 141,227 1,325 0.94 135,792 2,201 1.62
Time deposits.................. 238,323 7,950 3.34 247,516 9,228 3.73 247,182 10,971 4.44
Borrowed funds................. 27,328 1,066 3.90 18,812 840 4.47 13,960 678 4.86
-------- ------- ---- -------- ------- ---- -------- ------- ----
TOTAL INTEREST BEARING
LIABILITIES................ 529,941 10,457 1.97 520,761 12,450 2.39 495,412 15,256 3.08
NONINTEREST BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits................ 64,531 61,651 59,518
Other.......................... 9,898 11,141 9,037
Shareholders' equity........... 70,787 65,770 59,540
-------- -------- --------
TOTAL LIABILITIES AND
EQUITY..................... $675,157 $659,323 $623,507
======== ======== ========
NET INTEREST INCOME (FTE)........ $24,454 $24,626 $23,947
======= ======= =======
NET YIELD ON INTEREST EARNING
ASSETS (FTE)................... 3.97% 4.12% 4.24%
==== ==== ====

RESULTS OF OPERATIONS

Two key measures of earnings performance commonly used in the banking
industry are return on average assets and return on average shareholders'
equity. Return on average assets measures the ability of a corporation to
profitably and efficiently employ its resources. The Corporation's return on
average assets was 0.98% in 2004, 1.09% in 2003, and 1.11% in 2002. Return on
average equity indicates how effectively a corporation is able to generate
earnings on capital invested by its shareholders. The Corporation's return on
average shareholders' equity was 9.39% in 2004, 10.95% in 2003, and 11.63% in
2002.

NET INTEREST INCOME

The Corporation derives the majority of its gross income from interest
earned on loans and investments, while its most significant expense is the
interest cost incurred for funds used. Net interest income is the amount by
which interest income on earning assets exceeds the interest cost of deposits
and borrowings. Net interest income is influenced by changes in the balance and
mix of assets and liabilities and market interest rates. Management exerts some
control over these factors, however, Federal Reserve monetary policy and
competition have a significant impact. Interest income includes loan fees of
$1,102 in 2004, $1,752 in 2003, and $1,524 in 2002. For analytical purposes, net
interest income is adjusted to a "taxable equivalent" basis by adding the income
tax savings from interest on tax-exempt loans and securities, thus making
year-to-year comparisons more meaningful.

TABLE 2. VOLUME AND RATE VARIANCE ANALYSIS

The following table details the dollar amount of changes in FTE net
interest income for each major category of interest earning assets and interest
bearing liabilities and the amount of change attributable to changes in average
balances (volume) or average rates. The change in interest due to both volume
and rate has been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of the change in each.

2004 COMPARED TO 2003 2003 COMPARED TO 2002
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
-------------------------- --------------------------
VOLUME RATE NET VOLUME RATE NET
------ ------- ------- ------ ------- -------

CHANGES IN INTEREST INCOME
Loans............................... $2,231 $(3,626) $(1,395) $ 682 $(3,040) $(2,358)
Taxable investment securities....... (313) (428) (741) 1,156 (916) 240
Nontaxable investment securities.... 378 (271) 107 242 (7) 235
Federal funds sold.................. (101) (62) (163) (136) (94) (230)
Other investments................... 7 20 27 7 (21) (14)
------ ------- ------- ------ ------- -------
TOTAL CHANGES IN INTEREST
INCOME......................... 2,202 (4,367) (2,165) 1,951 (4,078) (2,127)
CHANGES IN INTEREST EXPENSE
Interest bearing demand deposits.... (60) (428) (488) 188 (537) (349)
Savings deposits.................... 141 (594) (453) 85 (961) (876)
Time deposits....................... (333) (945) (1,278) 15 (1,758) (1,743)
Other borrowings.................... 343 (117) 226 220 (58) 162
------ ------- ------- ------ ------- -------
TOTAL CHANGES IN INTEREST
EXPENSE........................ 91 (2,084) (1,993) 508 (3,314) (2,806)
------ ------- ------- ------ ------- -------
NET CHANGE IN FTE NET INTEREST
INCOME.............................. $2,111 $(2,283) $ (172) $1,443 $ (764) $ 679
====== ======= ======= ====== ======= =======

As shown in Tables 1 and 2, when comparing year ending December 31, 2004 to
2003, fully taxable equivalent (FTE) net interest income decreased $172 or
0.70%. An increase of 3.02% in average interest earning assets provided $2,202
of FTE interest income. The majority of this growth was funded by a 1.76%
increase in interest bearing liabilities, resulting in $91 of additional
interest expense. Overall, changes in volume resulted in $2,111 in additional
FTE interest income. The average FTE interest rate earned on assets

decreased by 0.53%, decreasing FTE interest income by $4,367, and the average
rate paid on deposits decreased by 0.42%, decreasing interest expense by $2,084.
The net change related to interest rates earned and paid was a $2,283 decrease
in FTE net interest income.

The Corporation's FTE net yield as a percentage of average earning assets
decreased 0.15%. A $650 decline in loan fees in 2004 from 2003 accounted for
0.10% of the decline. The decline in these fees was a result of a $140.1 million
decline in the origination and sales of residential mortgages to the secondary
market as the recent refinancing boom has slowed. The remaining decline was a
result of the average rate earned on earning assets declining faster than the
average rate paid on interest bearing liabilities.

Net interest income increased $679 to $24,626 in 2003 from $23,947 in 2002.
As shown in Tables 1 and 2, in 2003 (FTE) interest income increased $1,951, from
a 5.7% increase in the volume of average earning assets. The growth of interest
earning assets was funded primarily by a 5.1% increase in interest bearing
liabilities that resulted in additional interest expense of $508. Overall, the
Corporation earned an additional $1,443 in FTE interest income as a result of
increased volume. The average rate earned in 2003 decreased by 0.73%, decreasing
FTE interest income by $4,078, and the average rate paid on deposits decreased
by 0.69%, decreasing interest expense by $3,314. The net change related to
interest rates earned and paid was a $764 decrease in FTE net interest income.

PROVISION FOR LOAN LOSSES

The viability of any financial institution is ultimately determined by its
management of credit risk. Net loans outstanding represent 65.8% of the
Corporation's total year end assets and is the Corporation's single largest
concentration of risk. Inevitably, poor operating performance may result from
the failure to control credit risk. Given the importance of maintaining sound
underwriting practices, the Banks' Boards of Directors and senior management
teams spend a large portion of their time and effort in loan review. The
provision for loan losses is the amount added to the allowance for loan losses
on a monthly basis. The allowance for loan losses is management's estimation of
potential losses inherent in the loan portfolio, and is maintained at a level
considered by management to be adequate to absorb potential losses. Evaluation
of the allowance for loan losses and the provision for loan losses is based on a
continuous review of the changes in the type and volume of the loan portfolio,
reviews of specific loans to evaluate their collectibility, past and recent loan
loss history, financial condition of borrowers, the amount of impaired loans,
overall economic conditions, and other factors. This evaluation is inherently
subjective as it requires material estimates, including the amounts and timing
of future cash flows expected to be received on impaired loans that may be
subject to significant change.

As shown in Table 3, total loans outstanding increased 6.8% in 2004 and
increased 5.4% in 2003. The provision for loan losses in 2004 was $735, a $720
decrease from 2003 and a $290 decrease from 2002. Net charge offs to average
loans was 0.11% in 2004 and 0.21% in 2003, and have averaged 0.13% during the
past 5 years versus the average of 0.17% for all commercial banks in the State
of Michigan. The Corporation's substandard loans were 0.72% as of December 31,
2004, a 0.57% decrease from 2003, and below the September 30, 2004 ratio of
0.83% for all commercial banks in the State of Michigan. The 2003 provision for
loan losses was increased as a result of a combination of factors. During the
last quarter of 2003 the Corporation experienced a decline in the overall credit
quality of its outstanding agricultural loans. The Corporation undertook a
detailed review of the credit quality of all significant agricultural lending
relationships, and identified the most significant troubled loans. The primary
factor for the decline in the credit quality was a result of three consecutive
years of weak cash flows due to both low farm commodity prices and unfavorable
growing conditions in mid-Michigan. The Corporation tightened its credit
granting standards during 2003 and continues to monitor existing relationships
for further deterioration.

The allowance to loan losses as a percentage of loans decreased from 1.46%
as of December 31, 2003 to 1.42% as of December 31, 2004. Management believes
that the allowance for loans is adequate as of December 31, 2004.

TABLE 3. SUMMARY OF LOAN LOSS EXPERIENCE

The following is a summary of loan balances at the end of each year and
their daily average balances, changes in the allowance for loan losses arising
from loans charged off and recoveries on loans previously charged off, and
additions to the allowance that have been expensed.

YEAR ENDED DECEMBER 31
----------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------

Amount of loans outstanding at the end
of year............................... $455,234 $426,174 $404,480 $397,864 $403,679
======== ======== ======== ======== ========
Average gross loans outstanding for the
year.................................. $437,438 $404,953 $396,234 $404,586 $380,392
======== ======== ======== ======== ========
Summary of changes in allowance
Allowance for loan losses -- January
1.................................. $ 6,204 $ 5,593 $ 5,471 $ 5,162 $ 4,622
Loans charged off
Commercial and agricultural...... 561 578 506 271 65
Real estate mortgage............. 0 117 236 70 58
Personal......................... 374 445 460 351 295
-------- -------- -------- -------- --------
TOTAL LOANS CHARGED OFF....... 935 1,140 1,202 692 418
Recoveries
Commercial and agricultural...... 191 93 140 35 172
Real estate mortgage............. 62 29 18 41 64
Personal......................... 187 174 141 155 157
-------- -------- -------- -------- --------
TOTAL RECOVERIES.............. 440 296 299 231 393
Net charge offs.................... 495 844 903 461 25
Provision charged to income........ 735 1,455 1,025 770 565
-------- -------- -------- -------- --------
ALLOWANCE FOR LOAN LOSSES -- DECEMBER
31................................. $ 6,444 $ 6,204 $ 5,593 $ 5,471 $ 5,162
======== ======== ======== ======== ========
Ratio of net charge offs during the
year to average loans
outstanding........................ 0.11% 0.21% 0.23% 0.11% 0.01%
======== ======== ======== ======== ========
Ratio of the allowance for loan losses
to loans outstanding at year end... 1.42% 1.46% 1.38% 1.38% 1.28%
======== ======== ======== ======== ========

As shown in Table 4, the percentage of loans classified as nonperforming by
the Corporation as of December 31, 2004 and 2003 was 0.72% and 1.29% of total
loans, respectively. Average nonperforming loans for the peer group were 0.53%.
The peer group is a composite of financial information of all bank holding
companies with assets between $500 million and $1 billion. There were 353 bank
holding companies in the Corporation's peer group nationwide for the period
indicated. The Banks' policies, including a loan considered impaired under
Statement of Financial Accounting Standards No. 118, are to transfer a loan to
nonaccrual status whenever it is determined that interest should be recorded on
the cash basis instead of the accrual basis because of a deterioration in the
financial position of the borrower, or a determination that payment in full of
interest or principal cannot be expected, or the loan has been in default for a
period of 90 days or more, unless it is both well secured and in the process of
collection.

TABLE 4. NONPERFORMING LOANS

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

DECEMBER 31
------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------

Nonaccrual loans.......................... $1,900 $4,121 $2,484 $1,346 $ 382
Accruing loans past due 90 days or more... 702 1,380 1,840 1,219 1,484
Restructured loans........................ 686 -- 479 -- --
------ ------ ------ ------ ------
TOTAL NONPERFORMING LOANS............... $3,288 $5,501 $4,803 $2,565 $1,866
====== ====== ====== ====== ======
NONPERFORMING LOANS AS % OF LOANS......... 0.72% 1.29% 1.19% 0.64% 0.46%
====== ====== ====== ====== ======

As of December 31, 2004, there were no other interest bearing assets which
required classification. Management is not aware of any recommendations by
regulatory agencies that, if implemented, would have a material impact on the
Corporation's liquidity, capital, or operations.

Management's internal analysis of the estimated range for the allowance was
$4,135 to $8,088 as of December 31, 2004. In management's opinion, the allowance
for loan losses of $6,444 is adequate as of December 31, 2004. Management has
allocated, as reflected in Table 5, the allowance for loan losses to the
following categories: 36.9% to commercial and agricultural loans; 22.7% to real
estate loans; 24.9% to installment loans; 8.6% to impaired loans. The above
allocation is not intended to imply limitations on usage of the allowance. The
entire allowance is available to fund loan losses without regard to loan type.

TABLE 5. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses has been allocated according to the amount
deemed to be reasonably necessary to provide for the probability of losses being
incurred within the following categories:

DECEMBER 31
---------------------------------------------------------------------------------------------
2004 2003 2002 2001
--------------------- --------------------- --------------------- ---------------------
% OF EACH % OF EACH % OF EACH % OF EACH
CATEGORY CATEGORY CATEGORY CATEGORY
ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
--------- --------- --------- --------- --------- --------- --------- ---------

Commercial and
agricultural....... $2,381 42.3% $2,140 41.5% $1,868 44.1% $2,081 41.6%
Real Estate
Mortgage........... 1,463 50.5 1,584 47.8 1,649 45.5 1,408 47.8
Installment.......... 1,606 6.6 1,614 9.6 1,679 9.7 1,577 10.5
Impaired loans....... 557 0.6 622 1.1 103 0.7 56 0.1
Unallocated.......... 437 -- 244 -- 294 -- 349 --
------ ----- ------ ----- ------ ----- ------ -----
TOTAL.............. $6,444 100.0% $6,204 100.0% $5,593 100.0% $5,471 100.0%
====== ===== ====== ===== ====== ===== ====== =====

DECEMBER 31
---------------------
2000
---------------------
% OF EACH
CATEGORY
ALLOWANCE TO TOTAL
AMOUNT LOANS
--------- ---------

Commercial and
agricultural....... $1,301 39.4%
Real Estate
Mortgage........... 1,559 48.5
Installment.......... 1,923 12.1
Impaired loans....... -- --
Unallocated.......... 379 --
------ -----
TOTAL.............. $5,162 100.0%
====== =====

NONINTEREST INCOME

Noninterest income consists of trust fees, service charges on deposit
accounts, fees for other financial services, gain on the sale of mortgage loans,
title insurance revenue, and other insignificant categories. As is the case for
many financial institutions, management believes fee income is increasingly
important as a source of net earnings and expects this trend to continue. There
was a $2,580 or 24.0% decrease in noninterest income from these sources during
2004. Significant changes during 2004 include a $383 decrease from the sale of
title insurance and related services, an $873 decrease in mortgage servicing
income, and a $1,614 decrease in gains on the sale of real estate mortgages,
offset by a $313 increase in overdraft fees. During 2004, the Corporation had an
average investment of $10.1 million in bank-owned life insurance, a $139
increase over 2003. The average net rate earned on the investment was
approximately 4.10% in 2004 (versus 4.8% in 2003) and,

because of the instruments' tax free accumulation of earnings they have a
taxable equivalent rate of 6.22%. The rates on these contracts are adjustable
annually on their anniversary date. The investment is placed with five separate
insurance companies with S&P ratings of AA+ or better.

Included in noninterest income is a $477 gain from the sale of $55,055 of
mortgages during 2004 versus a $2,091 gain on the sale of $195,168 of mortgages
during 2003. The Corporation has established a policy that all 30-year fixed
rate mortgage loans will be sold. During 2004, most 15-year fixed rate mortgage
loans originated were sold on the secondary market. These loans were sold
without recourse, with servicing rights retained.

Noninterest income increased $2,642 in 2003 when compared to 2002.
Significant changes in 2003 include a $119 increase from the sale of title
insurance and related services, a $900 increase in overdraft fees, a $1,095
increase in mortgage servicing fees, a $329 increase in gains on the sale of
residential real estate mortgages and a $136 increase in income from bank-owned
life insurance.

NONINTEREST EXPENSES

Noninterest expenses decreased $1,307 or 5.5% during 2004. Noninterest
expenses net of noninterest income divided by average total assets equaled 2.09%
in 2004, 1.95% in 2003, and 2.03% in 2002. The increase in the 2004 ratio was
primarily a result of the $1,614 decrease in the gains on the sale of real
estate mortgages.

The largest component of noninterest expenses is compensation and benefits
expense, which decreased $660 or 4.9%. Salaries decreased $459. Employee
benefits decreased $218 in 2004. While there were normal merit and promotional
salary increases the net decrease is primarily related to the reduction in
compensation related to the decline in mortgage loan activity, as well as a
decrease related to a 22.7% decline in medical insurance expenses, both of which
were offset by a 13.8% increase in pension expense. Footnote F in the
Corporation's Notes to Consolidated Financial Statements includes disclosures
regarding the benefit obligations, plan assets, and funding status of the
Corporation's Defined Benefit Pension Plan. Over the last three years the plan
has experienced an accumulated loss of $318 on the Plan's investments. The
entire loss is related to the general decline in market value of stock equity
investments. Over the same time period, the actuarial assumption for the long
term rate of return on the assets held by the Plan should have produced a return
of $1.2 million. Essentially, the actual loss combined with the change in
actuarial assumptions related to the benefit obligation has produced a $2.5
million underfunding of the Plan's assets as of December 31, 2004. This
shortfall has significantly increased the Corporation's pension expense. During
2004 the Plan experienced a 6.4% return on beginning of the year Plan assets.

Occupancy and furniture and equipment expenses decreased $43 or 1.1% in
2004. The decrease is related to a reduction in depreciation expense. All other
operating expenses decreased $604. The most significant decreases are related to
donations, offset by an increase in professional services principally associated
with SOX mandated compliance efforts. Isabella Bank and Trust contributed
approximately $27 in 2004 to the IBT Foundation compared to a contribution of
$870 made in 2003. (See Note J to the accompanying Consolidated Financial
Statements.)

Noninterest expenses increased $2,806 or 13.5% in 2003. During 2003,
compensation and benefits expense increased $2,038, occupancy and furniture and
equipment expenses increased $332, and all other operating expenses increased
$436.

FEDERAL INCOME TAXES

Federal income tax expense for 2004 was $1,878 or 22.0% of pre-tax income
compared to $2,035 or 22.0% of pre-tax income in 2003 and $2,286 or 24.8% in
2002. A reconcilement of actual federal income tax expense reported and the
amount computed at the federal statutory rate of 34% is found in Note E, Federal
Income Taxes, in notes to the accompanying Consolidated Financial Statements.

ANALYSIS OF CHANGES IN FINANCIAL CONDITION

Total assets were $678,034 at December 31, 2004, an increase of $13,955 or
2.1% over year end 2003. Asset growth was primarily funded by a $12,929 increase
in other borrowed funds, and a $3,658 increase in shareholders' equity. A
discussion of changes in balance sheet amounts by major categories follows.

INVESTMENT SECURITIES

The primary objective of the Corporation's investing activities is to
provide for safety of the principal invested. Secondary considerations include
the need for earnings, liquidity, and the Corporation's overall exposure to
changes in interest rates. During 2004, the Corporation's net holdings of
investment securities decreased $8,591. Table 6 shows the carrying value of
investment securities available for sale and held to maturity. Securities held
to maturity, which are stated at amortized cost, consist mostly of local
municipal bond issues, and U.S. Agencies. Securities not classified by
management as held to maturity are classified as available-for-sale and are
stated at fair value.

TABLE 6. INVESTMENT PORTFOLIO

The following is a schedule of the carrying value of investment securities
available for sale and held to maturity:

DECEMBER 31
------------------------------
2004 2003 2002
-------- -------- --------

Available for sale
U.S. Treasury and U.S. government agencies......... $ 72,644 $ 89,934 $ 90,974
States and political subdivisions.................. 84,632 76,656 64,607
Commercial paper................................... 4,754 3,242 2,328
-------- -------- --------
TOTAL........................................... $162,030 $169,832 $157,909
======== ======== ========
Held to maturity
U.S. Treasury and U.S. government agencies......... $ 3 $ 9 $ 74
States and political subdivisions.................. 520 1,303 1,662
-------- -------- --------
TOTAL........................................... $ 523 $ 1,312 $ 1,736
======== ======== ========

Excluding those holdings of the investment portfolio in U.S. Treasury and
U.S. government agency securities, there were no investments in securities of
any one issuer that exceeded 10% of shareholders' equity. The Corporation has a
policy prohibiting investments in securities that it deems are unsuitable due to
their inherent credit or market risks. Prohibited investments include stripped
mortgage backed securities, zero coupon bonds, nongovernment agency asset backed
securities, and structured notes.

The following is a schedule of maturities of each category of investment
securities (at carrying value) and their weighted average yield as of December
31, 2004:

TABLE 7. SCHEDULE OF MATURITIES OF INVESTMENT SECURITIES
AND WEIGHTED AVERAGE YIELDS

MATURING
--------------------------------------------------------------------------------
AFTER ONE YEAR BUT AFTER FIVE YEARS BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS
--------------- ------------------- --------------------- ----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ----- --------- ------- ---------- -------- ------- ------

Available for sale
U.S. Treasury and U.S.
government agencies...... $20,289 3.10% $30,990 2.76% $ -- --% $ -- --%
States and political
subdivisions............. 9,416 4.64 44,891 4.64 26,910 4.50 3,415 2.90
Mortgage backed............. 23 2.70 14,281 3.89 7,061 3.60 -- --
Corporate & other
securities............... -- -- 4,754 3.56 -- -- -- --
------- ---- ------- ---- ------- ---- ------ ----
TOTAL.................... $29,728 3.59% $94,916 3.86% $33,971 4.31% $3,415 2.90%
======= ==== ======= ==== ======= ==== ====== ====
Held to maturity
States and political
subdivisions............. $ 195 7.40% $ 200 7.24% $ 125 4.64% $ -- --%
Mortgage backed............. 3 6.56 -- -- -- -- -- --
------- ---- ------- ---- ------- ---- ------ ----
TOTAL.................... $ 198 7.39% $ 200 7.24% $ 125 4.64% $ -- --%
======= ==== ======= ==== ======= ==== ====== ====

LOANS

The largest component of earning assets is loans. The proper management of
credit and market risk inherent in loans is critical to the financial well-being
of the Corporation. To control these risks, the Corporation has adopted strict
underwriting standards. The standards include prohibitions against lending
outside the Corporation's defined market area, lending limits to a single
borrower, and strict loan to collateral value limits. The Corporation also
monitors and limits loan concentrations extended to volatile industries. The
Corporation has no foreign loans and there were no concentrations greater than
10% of total loans that are not disclosed as a separate category in Table 8.

TABLE 8. LOAN PORTFOLIO

DECEMBER 31
----------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------

Commercial...................... $146,152 $129,392 $126,591 $115,457 $109,735
Agricultural.................... 49,179 52,044 54,788 50,524 49,221
Residential real estate
mortgage...................... 229,760 203,769 184,071 190,098 195,841
Installment..................... 30,143 40,969 39,029 41,785 48,881
-------- -------- -------- -------- --------
TOTAL LOANS................... $455,234 $426,174 $404,479 $397,864 $403,678
======== ======== ======== ======== ========

Total loans increased $29,060 in 2004. The increase was primarily in real
estate mortgages and commercial loans. As of December 31, 2004, as a percentage
of total loans, commercial loans were 32.1%, agricultural were 10.8%,
residential real estate mortgages were 50.5%, and installments were 6.6%.

DEPOSITS

Total deposits decreased $3,831 and were $563,876 at year end 2004, a 0.7%
decrease from 2003. Average deposits increased 0.6% in 2004 and 4.2% in 2003.
During 2004, average noninterest bearing deposits increased 4.7%, interest
bearing demand deposits decreased 5.9%, savings deposits increased 11.7%, and
time deposits

decreased 3.7%. Time deposits over $100 as a percentage of total deposits
equaled 12.9% and 12.2% as of December 31, 2004 and 2003, respectively.

TABLE 9. AVERAGE DEPOSITS

2004 2003 2002
---------------- ---------------- ----------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ---- -------- ---- -------- ----

Noninterest bearing demand
deposits........................... $ 64,531 $ 61,651 $ 59,518
Interest bearing demand deposits..... 106,471 0.53% 113,206 0.93% 98,478 1.43%
Savings deposits..................... 157,820 0.55 141,227 0.94 135,792 1.62
Time deposits........................ 238,323 3.34 247,516 3.73 247,182 4.44
-------- -------- --------
TOTAL.............................. $567,145 $563,600 $540,970
======== ======== ========

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

DECEMBER 31
---------------------------
2004 2003 2002
------- ------- -------

Maturity
Within 3 months....................................... $14,415 $18,068 $21,900
Within 3 to 6 months.................................. 12,762 11,475 15,928
Within 6 to 12 months................................. 14,216 8,184 18,624
Over 12 months........................................ 31,431 31,746 13,858
------- ------- -------
TOTAL.............................................. $72,824 $69,473 $70,310
======= ======= =======

Within the banking industry there is agreement that competition from mutual
funds and annuities has had a significant impact on deposit growth. In response,
the Corporation's subsidiaries now offer mutual funds and annuities to its
customers. The Corporation's trust department also offers a variety of financial
products in addition to traditional estate services.

CAPITAL

The capital of the Corporation consists solely of common stock, capital
surplus, retained earnings, and accumulated other comprehensive income. Total
capital increased approximately $3,658 in 2004. The Corporation offers a
dividend reinvestment and employee stock purchase plan. Under the provisions of
these Plans, the Corporation issued 57,388 shares of common stock generating
$2,001 of capital during 2004, and 70,340 shares of common stock generating
$2,008 of capital in 2003. In October 2002 the Board of Directors authorized
management to repurchase up to $2.0 million of the Corporation's common stock. A
total of 4,571 shares were repurchased in 2004 at an average price of $42 per
share. Accumulated other comprehensive income decreased $1,726 and consists of a
$1,738 decrease in unrealized gain on available-for-sale investment securities
reduced by a gain of $12 related to the recognition of a decrease in the
additional minimum pension liability.

The Federal Reserve Board's current recommended minimum primary capital to
assets requirement is 6.0%. The Corporation's primary capital to assets, which
consists of shareholders' equity plus the allowance for loan losses less
acquisition intangibles, was 11.2% at year end 2004. There are no commitments
for significant capital expenditures.

The Federal Reserve Board has established a minimum risk based capital
standard. Under this standard, a framework has been established that assigns
risk weights to each category of on and off-balance-sheet items to arrive at
risk adjusted total assets. Regulatory capital is divided by the risk adjusted
assets with the resulting ratio compared to the minimum standard to determine
whether a corporation has adequate capital. The minimum standard is 8%, of which
at least 4% must consist of equity capital net of goodwill. The following table
sets forth the percentages required under the Risk Based Capital guidelines and
the Corporation's values at December 31, 2004:

PERCENTAGE OF CAPITAL TO
RISK ADJUSTED ASSETS:
------------------------
REQUIRED IBT BANCORP
--------- ------------

Equity Capital.............................................. 4.00% 15.14%
Secondary Capital........................................... 4.00 1.25
---- -----
TOTAL CAPITAL............................................... 8.00% 16.39%
==== =====

IBT Bancorp's secondary capital includes only the allowance for loan
losses. The percentage for the secondary capital under the required column is
the maximum amount allowed from all sources.

The Federal Reserve also prescribes minimum capital requirements for the
Corporation's subsidiary Banks. At December 31, 2004, the Banks exceeded these
minimums. For further information regarding the Banks' capital requirements,
refer to Note M of the Notes to the accompanying Consolidated Financial
Statements, Regulatory Capital Matters.

LIQUIDITY

Liquidity management is designed to have adequate resources available to
meet depositor and borrower discretionary demands for funds. Liquidity is also
required to fund expanding operations, investment opportunities, and payment of
cash dividends. The primary sources of the Corporation's liquidity are cash and
cash equivalents and available-for-sale investment securities.

As of December 31, 2004 and 2003, cash and cash equivalents equaled 3.1%
and 4.7%, respectively, of total assets. Net cash provided from operations was
$12,742 in 2004 and $19,864 in 2003. Net cash provided by financing activities
equaled $7,837 in 2004 and $5,511 in 2003. The Corporation's investing
activities used cash amounting to $31,037 in 2004 and $48,594 in 2003. The
accumulated effect of the Corporation's operating, investing, and financing
activities on cash and cash equivalents was a $10,458 decrease in 2004 and a
$23,219 decrease in 2003.

In addition to cash and cash equivalents, available-for-sale investment
securities are another source of liquidity. Securities available for sale
equaled $162,030 as of December 31, 2004 and $169,832 as of December 31, 2003.
In addition to these primary sources of liquidity, the Corporation has the
ability to borrow in the federal funds market and at both the Federal Reserve
Bank and the Federal Home Loan Bank. The Corporation's liquidity is considered
adequate by the management of the Corporation.

INTEREST RATE SENSITIVITY

Interest rate sensitivity management aims at achieving reasonable stability
in the net interest margin through periods of changing interest rates. Interest
rate sensitivity is determined by the amount of earning assets and interest
bearing liabilities repricing within a specific time period, and their relative
sensitivity to a change in interest rates. One tool used by management to
measure interest rate sensitivity is gap analysis. As shown in Table 11, the gap
analysis depicts the Corporation's position for specific time periods and the
cumulative gap as a percentage of total assets.

Investment securities and other investments are scheduled according to
their contractual maturity. Fixed rate loans are included in the appropriate
time frame based on their scheduled amortization. Variable rate loans are
included in the time frame of their earliest repricing. Of the $455,234 in total
loans, $94,363 are variable rate loans. Time deposit liabilities are scheduled
based on their contractual maturity except for

variable rate time deposits in the amount of $1,398 that are included in the 0
to 3 month time frame. Money market accounts reprice monthly and are included in
the 0 to 3 month time frame.

Passbook savings, statement savings, and NOW accounts have no contractual
maturity date and are believed to be predominantly noninterest rate sensitive by
management. These accounts have been classified in the gap table according to
their estimated withdrawal rates based upon management's analysis of deposit
runoff over the past five years. Management believes this runoff experience is
consistent with its expectation for the future. As of December 31, 2004, the
Corporation had $8,941 more in liabilities than assets maturing within one year.
A negative gap position results when more liabilities, within a specified time
frame, mature or reprice than assets.

TABLE 11. INTEREST RATE SENSITIVITY

The following table shows the time periods and the amount of assets and
liabilities available for interest rate repricing as of December 31, 2004. For
purposes of this analysis, nonaccrual loans and the allowance for loan losses
are excluded.

0 TO 3 4 TO 12 1 TO 5 OVER 5
MONTHS MONTHS YEARS YEARS
-------- -------- -------- -------

Interest Sensitive Assets
Investment securities..................... $ 3,947 $ 11,093 $ 91,290 $56,223
Loans..................................... 119,069 43,191 249,905 41,169
-------- -------- -------- -------
TOTAL.................................. $123,016 $ 54,284 $341,195 $97,392
======== ======== ======== =======
Interest Sensitive Liabilities
Borrowed funds............................ $ 3,504 $ -- $ 18,166 $ 9,312
Time deposits............................. 35,363 83,825 112,223 2,852
Savings................................... 2,174 6,681 59,007 2,010
Interest bearing demand................... 27,457 27,237 136,772 2,539
-------- -------- -------- -------
TOTAL.................................. $ 68,498 $117,743 $326,168 $16,713
======== ======== ======== =======
Cumulative gap (deficiency)................. $ 54,518 $ (8,941) $ 6,086 $86,765
Cumulative gap (deficiency) as a % of
assets.................................... 8.04% (1.32)% 0.90% 12.80%

TABLE 12. LOAN MATURITY AND INTEREST RATE SENSITIVITY

The following table shows the maturity of commercial and agricultural loans
outstanding at December 31, 2004. 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................... $55,680 $133,398 $6,253 $195,331
======= ======== ====== ========
Interest Sensitivity:
Loans maturing after one year that have:
Fixed interest rates..................... $108,588 $3,879
Variable interest rates.................. 24,810 2,374
-------- ------
TOTAL.................................. $133,398 $6,253
======== ======

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Corporation's primary market risks are interest rate risk and, to a
lesser extent, liquidity risk. The Corporation has no foreign exchange risk,
holds limited loans outstanding to oil and gas concerns, holds no trading
account assets, nor does it utilize interest rate swaps or derivatives in the
management of its interest rate risk. Any changes in foreign exchange rates or
commodity prices would have an insignificant impact, if any, on the
Corporation's interest income and cash flows. The Corporation does have a
significant amount of loans extended to borrowers in agricultural production.
Their cash flow and their ability to service their debt is largely dependent on
the commodity prices for corn, soybeans, sugar beets, milk, beef, and a variety
of dry beans. The Corporation mitigates these risks by using conservative price
and production yields when calculating a borrower's available cash flow to
service their debt.

Interest rate risk ("IRR") is the exposure of the Corporation's net
interest income, its primary source of income, to changes in interest rates. IRR
results from the difference in the maturity or repricing frequency of a
financial institution's interest earning assets and its interest bearing
liabilities. IRR is the fundamental method in which financial institutions earn
income and create shareholder value. Excessive exposure to IRR could pose a
significant risk to the Corporation's earnings and capital.

The Federal Reserve, the Corporation's primary Federal regulator, has
adopted a policy requiring the Board of Directors and senior management to
effectively manage the various risks that can have a material impact on the
safety and soundness of the Corporation. The risks include credit, interest
rate, liquidity, operational, and reputational. The Corporation has policies,
procedures and internal controls for measuring and managing these risks.
Specifically, the IRR policy and procedures include defining acceptable types
and terms of investments and funding sources, liquidity requirements, limits on
investments in long term assets, limiting the mismatch in repricing opportunity
of assets and liabilities, and the frequency of measuring and reporting to the
Board of Directors.

The Corporation uses several techniques to manage IRR. The first method is
gap analysis. Gap analysis measures the cash flows and/or the earliest repricing
of the Corporation's interest bearing assets and liabilities. This analysis is
useful for measuring trends in the repricing characteristics of the balance
sheet. Significant assumptions are required in this process because of the
imbedded repricing options contained in assets and liabilities. A substantial
portion of the Corporation's assets are invested in loans and mortgage backed
securities. These assets have imbedded options that allow the borrower to repay
the balance prior to maturity without penalty. The amount of prepayments is
dependent upon many factors, including the interest rate of a given loan in
comparison to the current interest rate for residential mortgages, the level of
sales of used homes, and the overall availability of credit in the market place.
Generally, a decrease in interest rates will result in an increase in the
Corporation's cash flows from these assets. Investment securities, other than
those that are callable, do not have any significant imbedded options. Savings
and checking deposits may generally be withdrawn on request without prior
notice. The timing of cash flow from these deposits is estimated based on
historical experience. Time deposits have penalties that discourage early
withdrawals.

The second technique used in the management of IRR is to combine the
projected cash flows and repricing characteristics generated by the gap analysis
and the interest rates associated with those cash flows to project future
interest income. By changing the amount and timing of the cash flows and the
repricing interest rates of those cash flows, the Corporation can project the
effect of changing interest rates on its interest income. Based on the
projections prepared for the year ended December 31, 2004 the Corporation's net
interest income would increase during a period of increasing interest rates.

The following tables provide information about the Corporation's assets and
liabilities that are sensitive to changes in interest rates as of December 31,
2004 and 2003. The Corporation has no interest rate swaps, futures contracts, or
other derivative financial options. The principal amounts of assets and time
deposits maturing were calculated based on the contractual maturity dates.
Savings and NOW accounts are based on management's estimate of their future cash
flows.

QUANTITATIVE DISCLOSURES OF MARKET RISK

FAIR VALUE
2005 2006 2007 2008 2009 THEREAFTER TOTAL 12/31/04
-------- ------- ------- ------- ------- ---------- -------- ----------

Rate sensitive assets
Other interest
bearing assets..... $ 199 -- -- -- -- -- $ 199 $ 199
Average interest
rates............ 3.79% -- -- -- -- -- 3.79%
Fixed interest rate
securities......... $ 15,039 $26,096 $32,359 $24,812 $ 8,024 $56,223 $162,553 $162,567
Average interest
rates............ 3.87% 3.17% 2.99% 3.25% 3.81% 3.72% 3.43%
Fixed interest rate
loans.............. $ 69,428 $53,281 $69,581 $58,933 $68,047 $41,601 $360,871 $326,590
Average interest
rates............ 6.44% 6.31% 6.08% 6.10% 5.81% 5.25% 6.04%
Variable interest
rate loans......... $ 64,199 $ 4,434 $ 8,054 $ 8,481 $ 6,320 $ 2,875 $ 94,363 $ 94,363
Average interest
rates............ 6.22% 6.28% 6.30% 6.01% 6.32% 8.65% 6.29%
Rate sensitive
liabilities
Borrowed funds....... $ 3,504 $10,500 $ 4,166 $ 0 $ 3,500 $ 9,312 $ 30,982 $ 26,466
Average interest
rates............ 2.19% 3.86% 3.49% 0.00% 3.66% 5.16% 3.99%
Savings and NOW
accounts........... $ 63,549 $56,872 $73,117 $36,878 $28,915 $ 4,547 $263,878 $263,876
Average interest
rates............ 1.09% 0.56% 0.50% 0.35% 0.73% 0.55% 0.66%
Fixed interest rate
time deposits...... $118,333 $46,859 $34,415 $17,600 $12,805 $ 2,852 $232,864 $219,135
Average interest
rates............ 3.01% 3.87% 3.91% 3.43% 3.51% 4.11% 3.39%
Variable interest
rate time
deposits........... $ 855 $ 543 -- -- -- -- $ 1,398 $ 1,398
Average interest
rates............ 2.02% 2.01% -- -- -- -- 2.02%

FAIR VALUE
2004 2005 2006 2007 2008 THEREAFTER TOTAL 12/31/03
-------- ------- ------- ------- ------- ---------- -------- ----------

Rate sensitive assets
Other interest
bearing assets..... $ 5,400 $ 99 -- -- -- -- $ 5,499 $ 5,499
Average interest
rates............ 1.03% 2.67% -- -- -- -- 1.06%
Fixed interest rate
securities........... $ 50,268 $33,303 $24,377 $14,790 $ 6,316 $42,090 $171,144 $171,181
Average interest
rates............ 3.61% 2.87% 3.09% 3.18% 3.69% 4.42% 3.56%
Fixed interest rate
loans.............. $ 99,216 $71,181 $69,309 $24,607 $43,471 $29,775 $337,559 $340,558
Average interest
rates............ 6.74% 7.11% 6.17% 6.57% 6.10% 4.97% 6.45%
Variable interest
rate loans......... $ 62,619 $ 6,722 $ 6,227 $ 4,802 $ 6,724 $ 1,521 $ 88,615 $ 88,615
Average interest
rates............ 5.54% 5.62% 5.52% 5.49% 5.06% 4.55% 5.49%
Rate sensitive
liabilities
Borrowed funds....... $ 1,552 $ 1,053 $ 53 $ 53 $ 5,053 $10,289 $ 18,053 $ 19,118
Average interest
rates............ 0.86% 5.01% 4.16% 4.16% 5.08% 4.35% 4.29%
Savings and NOW
accounts........... $154,490 $22,778 $18,518 $15,160 $14,018 $36,305 $261,269 $261,268
Average interest
rates............ 0.76% 0.76% 0.78% 0.69% 0.48% 0.43% 0.70%
Fixed interest rate
time deposits...... $110,188 $52,683 $33,216 $27,802 $11,803 $ 841 $236,533 $243,094
Average interest
rates............ 2.33% 4.73% 4.48% 4.20% 3.47% 7.95% 3.46%
Variable interest
rate time
deposits........... $ 1,048 $ 448 $ 0 $ 182 $ 467 $ 0 $ 2,145 $ 2,145
Average interest
rates............ 1.24% 1.24% -- -- 3.52% -- 1.63%

FORWARD LOOKING STATEMENTS

This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Corporation intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Corporation, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Corporation's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations and future prospects of the Corporation and the subsidiaries include,
but are not limited to, changes in interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Corporation's market area, and accounting principles, policies and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning the Corporation and its business,
including additional factors that could materially affect the Corporation's
financial results is included in the Corporation's filings with the Securities
and Exchange Commission.

COMMON STOCK AND DIVIDEND INFORMATION

There is no established market for the Corporation's common stock or public
information with respect to its market price. There are occasional sales by
shareholders of which management of the Corporation is aware. From January 1,
2003 through December 31, 2004 there were, so far as management knows, 161 sales
of the

Corporation's common stock. These sales involved 89,409 shares. The prices were
reported to management in only some of the transactions and management cannot
confirm the prices that were reported during this period. The highest known
price paid for the Corporation's stock was $42 per share in the fourth quarter
of 2004, and the lowest price was $31.82 per share in the first quarter of 2003.
The following is a summary of all known transfers since January 1, 2003. All of
the information has been adjusted to reflect the 10% stock dividend paid
February 19, 2004.

SALE PRICE
NUMBER OF NUMBER OF ---------------
PERIOD SALES SHARES LOW HIGH
------ --------- --------- ------ ------

2003
First Quarter................................ 28 12,448 $31.82 $34.55
Second Quarter............................... 17 12,227 36.36 36.36
Third Quarter................................ 21 11,198 36.36 36.36
Fourth Quarter............................... 16 2,860 36.36 36.36
2004
First Quarter................................ 13 6,046 $40.00 $42.00
Second Quarter............................... 21 33,400 42.00 42.00
Third Quarter................................ 36 7,638 42.00 42.00
Fourth Quarter............................... 9 3,592 42.00 42.00

The following table sets forth the cash dividends paid for the following
quarters, adjusted for the 10% stock dividend paid on February 19, 2004.

PER SHARE
-------------
2004 2003
----- -----

First Quarter............................................... $0.11 $0.10
Second Quarter.............................................. 0.11 0.10
Third Quarter............................................... 0.11 0.10
Fourth Quarter.............................................. 0.30 0.30
----- -----
TOTAL..................................................... $0.63 $0.60
===== =====

IBT Bancorp's authorized common stock consists of 10,000,000 shares, of
which 4,896,412 shares are issued and outstanding as of December 31, 2004. As of
year end 2004, there were approximately 2,075 shareholders of record.

SUPERVISION AND REGULATION

IBT Bancorp is subject to supervision and regulation by the Federal Reserve
Board, under the Bank Holding Company Act of 1956, as amended. A bank holding
company and its subsidiaries are able to conduct only the business of commercial
banking and activities closely related or incidental to it.

Isabella Bank and Trust and Farmers State Bank are chartered by the State
of Michigan and are supervised and regulated by the Michigan Office of Financial
and Insurance Services, Division of Financial Institutions. The Banks are
members of the Federal Reserve System and their deposits are insured by the
Federal Deposit Insurance Corporation to the extent provided by law. IBT Title
is licensed and supervised by the State of Michigan.

IMPACT OF INFLATION

The majority of assets and liabilities of financial institutions are
monetary in nature. Generally, changes in interest rates have a more significant
impact on earnings of the Corporation than inflation. Although influenced by
inflation, changes in rates do not necessarily move in either the same magnitude
or direction as changes in the price of goods and services. Inflation does
impact the growth of total assets, creating a need to increase equity capital at
a higher rate to maintain an adequate equity to assets ratio, which in turn
reduces the amount of earnings available for cash dividends.
69

SHAREHOLDERS' INFORMATION

ANNUAL MEETING

The Annual Meeting of Shareholders will be held at 7:00 p.m., Tuesday,
April 26, 2005, Holiday Inn, 5665 E. Pickard Street, Mt. Pleasant, Michigan.

FINANCIAL INFORMATION AND FORM 10-K

Copies of the 2004 Annual Report, IBT Bancorp Form 10-K, and other financial
information not contained herein may be obtained, without charge, by writing to:

Mary Ann Breuer
Secretary
IBT Bancorp
200 East Broadway
Mt. Pleasant, Michigan 48858

MISSION STATEMENT

The mission of IBT Bancorp shall be:

To create an operating environment that will provide shareholders with
sustained growth in their investment while maintaining our independence and
subsidiaries' autonomy.

EQUAL EMPLOYMENT OPPORTUNITY

The equal employment opportunity clauses in Section 202 of the Executive
Order 11246, as amended; 38 USC 2012, Vietnam Era Veterans Readjustment Act of
1974; Section 503 of the Rehabilitation Act of 1973, as amended; relative to
equal employment opportunity and implementing rules and regulations of the
Secretary of Labor are adhered to and supported by IBT Bancorp, and its
subsidiaries.

IBT BANCORP PROXY
200 EAST BROADWAY
MT. PLEASANT, MI 48858

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

The undersigned hereby appoints David W. Hole, William J. Strickler, and Dale D.
Weburg as Proxies, each with the power to appoint his substitute, and hereby
authorizes them to represent and to vote as designated below, all the shares of
Common Stock of IBT Bancorp held of record by the undersigned on March 1, 2005
at the annual meeting of shareholders to be held April 26, 2005 or any
adjournments thereof.

ELECTION OF DIRECTORS:

FOR ALL NOMINEES LISTED BELOW [ ] WITHHOLD AUTHORITY TO VOTE [ ]
EXCEPT AS MARKED TO THE FOR ALL NOMINEES LISTED
CONTRARY BELOW

(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, CIRCLE
THE NOMINEE'S NAME IN THE LIST BELOW.)

RICHARD J. BARZ SANDRA L. CAUL TIMOTHY M. MILLER RONALD E. SCHUMACHER

(CONTINUED AND TO BE SIGNED ON OTHER SIDE)

This proxy, when properly executed, will be voted in the manner directed herein
by the undersigned shareholder. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED TO ELECT ALL NOMINEES. The shares represented by this proxy will be voted
in the discretion of the proxies on any other matters which may come before the
meeting.

Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign full corporate name by the President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.

Dated:__________________________, 2005 ____________________________
Please mark, sign, date and return Signature
Proxy card promptly using the
enclosed envelope. ____________________________
Signature (if held jointly)