-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GE+BksDTSIRHBgfpDshAZjaK9By0rMPRwqFMfZTEgWpYpAAAE6dYlpd3vKrerYV7 P8g//6UHYH+d1N4BGC3Mvw== 0000946275-01-000140.txt : 20010319 0000946275-01-000140.hdr.sgml : 20010319 ACCESSION NUMBER: 0000946275-01-000140 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IBT BANCORP INC CENTRAL INDEX KEY: 0000801122 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 251532164 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25903 FILM NUMBER: 1569906 BUSINESS ADDRESS: STREET 1: 309 MAIN ST CITY: IRWIN STATE: PA ZIP: 15642 BUSINESS PHONE: 7248633100 MAIL ADDRESS: STREET 1: IBT BANCORP INC STREET 2: 309 MAIN ST CITY: IRWIN STATE: PA ZIP: 15642 10-K 1 0001.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2000 [ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to __________________ Commission File Number: 0-25903 IBT BANCORP, INC. --------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 25-1532164 - ------------------------------- ----------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 309 Main Street, Irwin, Pennsylvania 15642 - --------------------------------------- ---------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (724) 863-3100 ---------------------------- Securities registered pursuant to Section 12(b) of the Act: None -------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.25 par value ----------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO . ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Based on the closing sales price of $21.44 per share of the registrant's common stock on March 2, 2001, as reported on the OTC Bulletin Board, the aggregate market value of voting and non-voting stock held by non-affiliates of the registrant was approximately $56.7 million. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of 2000 Annual Report to Stockholders (Parts II and IV) 2. Portions of Proxy Statement for the 2001 Annual Meeting of Stockholders. (Part III) PART I Forward-Looking Statements IBT Bancorp, Inc. (the "Company" or "Registrant") may from time to time make written or oral "forward-looking statements," including statements contained in the Company's filings with the Securities and Exchange Commission (including this Annual Report on Form 10-K and the exhibits thereto), in its reports to stockholders and in other communications by the Company, which are made in good faith by the Company pursuant to the "safe harbor" provisions of the private securities litigation reform act of 1995. These forward-looking statements involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations, estimates and intentions, that are subject to change based on various important factors (some of which are beyond the Company's control). The following factors, among others, could cause the Company's financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements: the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary fluctuations; the timely development of and acceptance of new products and services of the Company and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services; the willingness of users to substitute competitors' products and services for the Company's products and services; the success of the Company in gaining regulatory approval of its products and services, when required; the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking, securities and insurance); technological changes, acquisitions; changes in consumer spending and saving habits; and the success of the Company at managing the risks involved in the foregoing. The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement, whether written or oral, that may be made from time to time by or on behalf of the Company. Item 1. Business - ----------------- General IBT Bancorp, Inc. is a Pennsylvania corporation headquartered in Irwin, Pennsylvania, which provides a full range of commercial and retail banking services through its wholly owned banking subsidiary, Irwin Bank & Trust Co. (collectively, the "Company"). Irwin Bank & Trust Co. (the "Bank") was incorporated in 1922 under the laws of Pennsylvania as a commercial bank under the name "Irwin Savings and Trust Company." The Bank engages in a full service mortgage, commercial and consumer banking business, as well as trust and a variety of deposit services provided to its customers. At December 31, 2000 the Bank operated through its main office, five branch offices, a loan center, and a trust office as well as through five supermarket branches under the name "Irwin Bank Extra." The Bank's main office, full service branch offices, loan center, trust office and supermarket branches are located in the Pennsylvania counties of Westmoreland and Allegheny. The Bank's web site is "www.irwinbank.com." References to the Company or Registrant used throughout this document generally refers to the consolidated entity which includes the main operating company, the Bank, unless the context indicates otherwise. Competition The Registrant's primary market area consists of Westmoreland and Allegheny counties, Pennsylvania, and is one of many financial institutions serving this market area. The competition for deposit products comes from other insured financial institutions such as commercial banks, thrift institutions and credit unions in the Registrant's market area. Deposit competition also includes a number of insurance products sold by local agents and investment products such as mutual funds and other securities sold by local and regional brokers. Loan competition comes from other insured financial institutions such as commercial banks, thrift institutions and credit unions. 2 Lending Activities Analysis of Loan Portfolio The following table sets forth the composition of the Registrant's loan portfolio in dollar amounts and in percentages of the respective portfolios at the dates indicated.
At December 31, ---------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------------- -------------------- ----------------- ------------------- ------------------ $ % $ % $ % $ % $ % --------- ------ -------- ------- -------- ------- -------- -------- -------- ------- (Dollars in Thousands) Type of Loans: - ------------- Mortgage.................... $152,753 51.95 $130,348 49.56 $123,494 51.31 $107,240 48.97 $ 99,118 50.28 Installment ................ 65,327 22.22 61,983 23.57 52,418 21.78 45,321 20.69 38,595 19.58 Commercial ................. 52,676 17.92 47,294 17.98 45,232 18.79 42,003 19.18 38,517 19.54 Home equity lines of credit. 10,067 3.42 8,886 3.38 8,588 3.57 8,860 4.05 8,723 4.42 PHEAA (1) .................. 6,632 2.26 6,166 2.34 5,043 2.10 4,604 2.10 4,632 2.35 Municipal .................. 5,945 2.02 6,347 2.41 3,616 1.50 7,870 3.59 4,733 2.40 Credit cards ............... -- -- 1,780 .68 1,808 .75 2,022 .93 2,228 1.13 Other ...................... 611 0.21 210 .08 477 .20 1,081 .49 585 .30 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Total loans .................. 294,011 100.00% 263,014 100.00% 240,676 100.00% 219,001 100.00% 197,131 100.00% ====== ====== ====== ====== ====== Less: Unearned discount........... -- -- -- -- 1 Deferred loan origination fees and costs............ 178 146 144 174 213 Allowance for loan losses... 1,919 2,366 2,228 2,340 2,240 ------- ------- ------- ------- ------- Total loans, net.............. $291,914 $260,502 $238,304 $216,487 $194,677 ======== ======== ======== ======== ========
- -------------------- (1) Pennsylvania Higher Education Assistance Authority. 3 Loan Maturity Table. The following table sets forth maturities and interest rate sensitivity for all categories of loans as of December 31, 2000. Scheduled repayments are reported in the maturity category in which payment is due.
Home equity lines of PHEAA Mortgage credit(2) Installment Commercial (1) Municipal Other Total --------- --------- ----------- ---------- ------- --------- ----- -------- (In Thousands) 1 year or less................ $ 6,732 $10,067 $10,866 $10,061 $ -- $5,945 $611 $ 44,282 After 1 year: 1 to 5 years................ 32,926 -- 30,599 12,662 6,632 -- -- 82,819 After 5 years............... 113,095 -- 23,862 29,953 -- -- -- 166,910 -------- ------- ------- ------- ------ ------ ---- -------- Total due after one year...... 146,021 -- 54,461 42,615 6,632 -- -- 249,729 -------- ------- ------- ------- ------ ------ ---- -------- Total amount due.............. $152,753 $10,067 $65,327 $52,676 $6,632 $5,945 $611 $294,011 ======== ======= ======= ======= ====== ====== ==== ========
- ---------------------- (1) PHEAA loans are sold when repayment begins; assumption is that all PHEAA loans will mature in 1 to 5 years. (2) Home equity credit lines have no stated maturities; therefor they are classified as due in one year or less. The following table sets forth, as of December 31, 2000, the dollar amount of all loans due after December 31, 2001, based upon fixed rates of interest or floating or adjustable interest rates. Floating or Fixed Rates Adjustable Rates Total ----------- ---------------- ----- (In Thousands) Mortgage(1) ....... $129,767 $16,254 $146,021 Installment......... 53,290 1,171 54,461 Commercial.......... 34,696 7,919 42,615 PHEAA............... -- 6,632 6,632 -------- ------- -------- Total.......... $217,753 $31,976 $249,729 ======== ======= ======== - -------------------------- (1) Included in the mortgage loans portfolio are commercial real estate loans. Commercial real estate loans are fixed rate loans that are primarily callable loans, which reprice every three, five or ten years, based upon the interest rate on similar loans at the time of repricing. See "Mortgage Loans." Mortgage Loans. The Registrant's primary lending activity consists of the origination of residential and commercial mortgage loans secured by property in its primary market area. The mortgage loan portfolio consists of one-to four- family residential mortgage loans, commercial real estate loans, and construction loans. The Registrant had approximately $76.1 million of one- to four-family residential mortgage loans in its mortgage loan portfolio at December 31, 2000. The Registrant generally originates one- to four-family residential mortgage loans in amounts of up to 80% of the appraised value of the mortgaged property without requiring mortgage insurance. The Registrant will originate residential mortgage loans in an amount up to 95% of the appraised value of a mortgaged property, however, mortgage insurance for the borrower is required. The Registrant offers residential fixed rate loans and adjustable rate loans with a 30 year 4 amortization period. Interest rates for adjustable rate loans for residences adjust every 12 months based upon the weekly average yield on the one year U.S. Treasury securities, plus a margin of 2.75 percentage points. These adjustable rate loans have an interest rate cap of 2% per year and 6% over the life of the loan, and are originated for retention in the portfolio. Fixed rate loans are underwritten in accordance with Federal National Mortgage Association ("FNMA") guidelines. Currently, loans underwritten in accordance with FNMA guidelines are generally sold in the secondary market. However, the number of saleable loans could vary materially as a result of market conditions. The Registrant generally charges a higher interest rate if loans are not saleable under FNMA guidelines. At December 31, 2000, $98.2 million of the Registrant's mortgage portfolio consisted of long- term fixed rate mortgage loans of which $334,000 were classified as held for sale. The Registrant does not service any loans that are sold and the Registrant is generally not liable for these loans (i.e., "nonrecourse loans"). Substantially all of the Registrant's one- to four-family mortgages include "due on sale" clauses, which are provisions giving the Registrant the right to declare a loan immediately payable if the borrower sells or otherwise transfers an interest in the property to a third party. Property appraisals on real estate securing the Registrant's one- to four-family residential loans over $250,000 are made by appraisers approved by the Board of Directors. Appraisals are performed in accordance with applicable regulations and policies. The Registrant obtains title insurance policies on all purchase money first mortgage real estate loans originated. The Registrant's commercial real estate mortgage loans are long-term loans secured primarily by multi-family dwelling units. Essentially all originated commercial real estate loans are within the its market area. Commercial real estate loans are originated at both fixed rate and adjustable rates of interest. Fixed rate loans are primarily callable loans having terms of up to 15 years, with principal and interest payments calculated using up to a 20 year amortization period. Callable loans reprice every three, five or ten years based upon the interest rate on similar loans at the time of repricing. At these specific time periods, the Registrant has the right but not the obligation to either accelerate the loan balance or adjust the interest rate of these loans. Adjustable rate commercial mortgage loans have interest rates set at the six month U.S. treasury bill rate, plus an upward adjustment of up to 3.75%. Adjustable rate commercial mortgage loans have terms of up to 20 years and generally have no maximum interest rate. As of December 31, 2000, the Registrant's commercial real estate loans totaled $61.0 million of the mortgage portfolio. Typically, commercial real estate loans are originated in amounts up to 75% of the appraised value of the mortgaged property. The Registrant also originates loans to finance the construction of one-to four-family dwellings. Generally, the Registrant only makes interim construction loans to individuals if it also makes the long-term one-to four-family residential mortgage loan on the property. Interim construction loans generally have terms of up to nine months with fixed rates of interest. At December 31, 2000, such loans totaled $12.4 million of the Registrant's total mortgage loan portfolio. Construction financing is generally considered to involve a higher degree of risk of loss than long- term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction and 5 development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Registrant may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, the Registrant may be confronted, at or prior to the maturity of the loan, with a project having a value which is insufficient to assure full repayment. Installment Loans. Installment loans primarily consist of home equity term loans and to a lesser extent automobile loans. Home equity loans are secured primarily by one- to four-family residences. The Registrant originates these loans with fixed rates with terms of up to 20 years. These loans are subject to 80% combined loan-to-value limitation, including any outstanding mortgages or liens, without requiring mortgage insurance. The Registrant will originate home equity loans in an amount up 100% of the appraised value, however, mortgage insurance for the borrower is required. The Registrant originates automobile loans with fixed rates of interest and terms of up to five years. At December 31, 2000, home equity term loans totaled $60.1 million. Commercial Loans. Commercial business loans consist of equipment, accounts receivables, inventory, and other business purpose loans. Such loans are secured by either the underlying collateral and/or by the personal guarantees of the borrower. Unlike residential mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his or her employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself and the general economic environment. Home Equity Lines of Credit. Revolving home equity lines of credit are secured primarily by one- to four-family residences. The lines of credit are subject to an 80% combined loan to value limitation, including all outstanding mortgages and liens. Loan Approval Authority and Underwriting. The Registrant establishes various lending limits for its officers and maintains an officer review committee. Certain officers generally have authority to approve loans up to $100,000. Loans between $100,000 and $500,000 are approved by an officers review committee ("ORC"). The ORC consists of the President and at least four other officers appointed by the President. All loans over $500,000 are approved by a majority of the Board of Directors. Upon receipt of a completed loan application from a prospective borrower, a credit report is ordered. Income and certain other information is verified. If necessary, additional financial information may be requested. An appraisal or other estimate of value of the real estate intended to be used as security for the proposed loan is obtained. Appraisals are performed by independent appraisers. Title insurance is generally required on all purchase money real estate mortgage loans. Borrowers also must obtain fire and casualty insurance. Flood insurance is also required on loans secured by property that is located in a flood zone. Loan Commitments. Written commitments are given to prospective borrowers on all approved mortgage loans. Generally, the commitment requires acceptance within 30 days of the date of issuance. At December 31, 2000, commitments to cover originations of mortgage loans totaled $13.6 million. 6 Loans to One Borrower. Federal regulations limit loans to one borrower in an amount equal to 15% of unimpaired capital and unimpaired surplus. If the loan is secured by readily marketable collateral, the limit is 25% of unimpaired capital and unimpaired surplus. At December 31, 2000, the Registrant's loan to one borrower limit was approximately $6.8 million. Classified Assets. Federal regulations provide for a classification system for problem assets of insured institutions, including assets previously treated as "scheduled items." Under this classification system, problem assets of insured institutions are classified as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection of principal in full," on the basis of currently existing facts, conditions and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets that do not expose the Registrant to risk sufficient to warrant classification in one of the above categories, but which possess some weakness, are required to be designated "special mention" by management. When an insured institution classifies problem assets as either "substandard" or "doubtful," it may establish allowances for loan losses in an amount deemed prudent by management. When an insured institution classifies problem assets as "loss," it is required either to establish an allowance for losses equal to 100% of that portion of the assets so classified or to charge off such amount. An institution's determination as to the classification of its assets and the amount of its allowances is subject to review by the Federal Deposit Insurance Corporation ("FDIC") which may order the establishment of additional loss allowances. The following table sets forth the Registrant's classified assets in accordance with its classification system. At December 31, 2000 -------------------- (In Thousands) Special Mention...................... $6,605 Substandard.......................... 1,908 Doubtful............................. -- Loss................................. -- ------ Total........................... $8,513 ====== Other Real Estate Owned. Real estate acquired by the Registrant as a result of foreclosure or by deed in lieu of foreclosure is classified as other real estate owned until such time as it is sold. When other real estate owned is acquired, it is recorded at the lower of the unpaid balance of the related loan or its fair value less disposal costs. Any write-down of other real estate owned is charged to operations. 7 Allowance for Losses on Loans. It is the policy of management to provide for losses on unidentified loans in its portfolio in addition to classified loans. A provision for loan losses is charged to operations based on management's evaluation of the potential losses that may be incurred in the Registrant's loan portfolio. Management also periodically performs valuations of other real estate owned and establishes allowances to reduce book values of the properties to their net realizable values when necessary. Management will continue to review the entire loan portfolio to determine the extent, if any, to which further additional loan loss provisions may be deemed necessary. There can be no assurance that the allowance for loan losses will be adequate to cover losses which may be realized in the future. In addition, there can be no assurance that additional provisions for losses on loans will not be required. Analysis of the Allowance for Loan Losses. The following table sets forth information with respect to the Registrant's allowance for loan losses at the dates indicated:
December 31, -------------------------------------------------------------- 2000 1999 1998 1997 1996 -------- --------- -------- -------- -------- (Dollars in Thousands) Total loans outstanding........................... $293,833 $ 262,868 $240,532 $218,827 $196,917 ======== ========= ======== ======== ======== Average loans outstanding......................... $279,400 $ 251,574 $226,984 $205,399 $186,845 ======== ========= ======== ======== ======== Allowance balances (at beginning of period)...... $2,366 $ 2,228 $ 2,340 $ 2,240 $ 1,969 Provision (credit): Mortgage....................................... 30 30 30 30 41 Installment.................................... 30 30 30 30 41 Commercial..................................... 240 225 225 225 308 Home equity lines of credit.................... -- -- -- -- -- PHEAA.......................................... -- -- -- -- -- Municipal...................................... -- -- -- -- -- Credit cards................................... -- 15 15 15 20 Other.......................................... -- -- -- -- -- Net (charge-offs) recoveries: -- -- -- Mortgage........................................ (34) (21) (19) (10) -- Installment..................................... (72) (24) (28) (27) (56) Commercial...................................... (616) (102) (324) (104) (59) Home equity lines of credit..................... -- -- -- (11) -- PHEAA........................................... -- -- -- -- -- Municipal....................................... -- -- -- -- -- Credit cards.................................... (25) (15) (41) (48) (24) Other........................................... -- -- -- -- -- -------- --------- -------- -------- -------- Allowance balance (at end of period).............. $ 1,919 $ 2,366 $ 2,228 $ 2,340 $ 2,240 ======== ========= ======== ======== ======== Allowance for loan losses as a percent of total loans outstanding...................... 0.65% 0.90% 0.93% 1.07% 1.14% ======== ========= ======== ======== ======== Net loans charged off as a percent of average loans outstanding....................... (0.27)% (0.06)% (0.18)% (0.10)% (0.07)% ======== ========= ======== ======== ========
8 Allocation of the Allowance For Loan Losses. The following table sets forth the allocation of the Registrant's allowance for loan losses by loan category and the percent of loans in each category to total loans at the date indicated.
At December 31, ---------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---------------- ----------------- --------------- ----------------- ------------------- % of % of % of % of % of Loans Loans Loans Loans Loans to Total to Total to Total to Total to Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- (Dollars in Thousands) At end of period allocated to: Mortgage....................... $ 651 51.95% $ 603 49.56% $ 604 51.31% $ 565 48.97% $ 588 50.28% Installment.................... 414 22.22 345 23.57 380 21.78 324 20.69 294 19.58 Commercial..................... 786 17.92 1,293 17.98 1,100 18.79 1,301 19.18 1,224 19.54 Home equity lines of credit.... 51 3.42 54 3.38 44 3.57 45 4.05 43 4.42 PHEAA.......................... 10 2.26 9 2.34 8 2.10 7 2.10 7 2.35 Municipal...................... 1 2.02 10 2.41 5 1.50 12 3.59 6 2.40 Credit cards................... -- -- 45 .68 80 .75 71 .93 74 1.13 Other.......................... 6 .21 7 .08 7 .20 15 .49 4 .30 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total allowance.................. $1,919 100.00% $2,366 100.00% $2,228 100.00% $2,340 100.00% $2,240 100.00% ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
9 Nonperforming and Problem Assets Loan Delinquencies. When a loan becomes 16 days past due, a notice of nonpayment is sent to the borrower. Telephone collection calls, letters and/or visits to the borrower are initiated within 16 days of the due date missed in an effort to resolve the delinquency. Generally, if the loan continues in a delinquent status for 90 days past due and no repayment plan has been reached, foreclosure, liquidation or other legal proceedings may be initiated. Loans are reviewed on a monthly basis and are placed on a non-accrual status when the loan becomes more than 90 days delinquent and when, in our opinion, the collection of additional interest is doubtful. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is charged against interest income. Subsequent interest payments, if any, are either applied to the outstanding principal balance or recorded as interest income, depending on the assessment of the ultimate collectibility of the loan. Nonperforming Assets. The following table sets forth information regarding nonaccrual loans and real estate owned, as of the dates indicated. No loans were categorized as troubled debt restructurings within the meaning of SFAS 15 and there were no impaired loans within the meaning of SFAS 114, as amended by SFAS 118. 10
At December 31, --------------------------------------------------------------- 2000 1999 1998 1997 1996 ------ ------ ------ -------- ------- (Dollars In Thousands) Loans accounted for on a non-accrual basis: Mortgage....................................... $ -- $ -- $ -- $ 29 $ -- Home equity lines of credit.................... -- 60 -- -- -- Installment.................................... -- -- -- -- 5 Commercial..................................... -- 91 12 205 114 PHEAA.......................................... -- -- -- -- -- Municipal...................................... -- -- -- -- -- Credit cards................................... -- -- -- -- -- Other.......................................... -- -- -- -- -- ------ ------ ------ ------ ---- Total............................................ $ -- 151 12 234 119 ------ ------ ------ ------ ---- Accruing loans which are contractually past due 90 days or more: Mortgage....................................... 1,067 998 788 362 493 Installment.................................... 10 21 3 21 7 Commercial..................................... 157 568 629 631 250 Home equity lines of credit.................... -- -- -- -- -- PHEAA.......................................... -- -- -- -- -- Municipal...................................... -- -- -- -- -- Credit cards................................... -- 3 8 9 11 Other.......................................... -- -- -- -- -- ------ ------ ------ ------ ---- Total............................................ 1,234 1,590 1,428 1023 761 ------ ------ ------ ------ ---- Total non-accrual and accrual loans.............. 1,234 1,741 1,440 1257 880 ------ ------ ------ ------ ---- Other real estate owned.......................... 132 141 128 37 53 ------ ------ ------ ------ ---- Other non-performing assets...................... -- -- -- -- -- ------ ------ ------ ------ ---- Total non-performing assets...................... $1,366 $1,882 $1,568 $1,294 $933 ====== ====== ====== ====== ==== Total non-accrual and accrual loans to net loans................................... .42% .67% .60% .58% .45% ====== ====== ====== ====== ==== Total non-accrual and accrual loans to total assets................................... .25% .39% .35% .34% .27% ====== ====== ====== ====== ==== Total non-performing assets to total assets...... .28% .42% .38% .35% .28% ====== ====== ====== ====== ====
11 Investment Activities The Registrant maintains a level of liquid assets, including short-term securities and certain other investments, which varies depending upon several factors, including: (i) the yields on investment alternatives, (ii) management's judgment as to the attractiveness of the yields then available in relation to other opportunities, (iii) expectation of future yield levels, and (iv) management's projections as to the short-term demand for funds to be used in loan origination and other activities. Investment securities, including mortgage-backed securities, are classified at the time of purchase, based upon management's intentions and abilities, as securities held to maturity or securities available for sale. Debt securities acquired with the intent and ability to hold to maturity are classified as held to maturity and are stated at cost and adjusted for amortization of premium and accretion of discount, which are computed using the level yield method and recognized as adjustments of interest income. All other debt securities are classified as available for sale to serve principally as a source of liquidity. Current regulatory and accounting guidelines regarding investment securities (including mortgage backed securities) require the Registrant to categorize securities as "held to maturity," "available for sale" or "trading." As of December 31, 2000, the Registrant had securities classified as "available for sale" in the amount of $167.9 million and had no securities classified as "held to maturity" or "trading." Securities classified as "available for sale" are reported for financial reporting purposes at the fair market value with net changes in the market value from period to period included as a separate component of stockholders' equity, net of income taxes. At December 31, 2000, the Registrant's securities available for sale had an amortized cost of $167.6 million and market value of $167.9 million (unrealized gain of $287,000). Changes in the market value of securities available for sale do not affect the Company's income. In addition, changes in the market value of securities available for sale do not affect the Bank's regulatory capital requirements or its loan-to-one borrower limit. At December 31, 2000, the Registrant's investment portfolio policy allowed investments in instruments such as: (i) U.S. Treasury obligations, (ii) U.S. federal agency or federally sponsored agency obligations, (iii) mortgage-backed securities, (iv) banker's acceptances, (v) certificates of deposit, and (vi) investment grade corporate bonds, and commercial paper. The board of directors may authorize additional investments. As a source of liquidity and to supplement the Registrant's lending activities, the Registrant has invested in residential mortgage-backed securities. Mortgage-backed securities can serve as collateral for borrowings and, through repayments, as a source of liquidity. Mortgage-backed securities represent a participation interest in a pool of single-family or other type of mortgages. Principal and interest payments are passed from the mortgage originators, through intermediaries (generally quasi-governmental agencies) that pool and repackage the participation interests in the form of securities. The quasi-governmental agencies guarantee the payment of principal and interest to investors and include the Federal Home Loan Mortgage Corporation ("FHLMC"), Government National Mortgage Association ("GNMA"), and Federal National Mortgage Association ("FNMA"). Mortgage-backed securities typically are issued with stated principal amounts. The securities are backed by pools of mortgages that have loans with interest rates that are within a set range and have varying maturities. The underlying pool of mortgages can be composed of either fixed rate or adjustable rate mortgage loans. Mortgage-backed securities are generally referred to as mortgage participation certificates or pass-through certificates. The interest rate risk characteristics of the underlying pool of mortgages (i.e., 12 fixed rate or adjustable rate) and the prepayment risk, are passed on to the certificate holder. The life of a mortgage-backed pass-through security is equal to the life of the underlying mortgages. Expected maturities will differ from contractual maturities due to scheduled repayments and because borrowers may have the right to call or prepay obligations with or without prepayment penalties. Mortgage-backed securities issued by FHLMC, GNMA, and FNMA make up a majority of the pass-through certificates market. Investment Portfolio. The following table sets forth the carrying value of the Registrant's investment securities portfolio at the dates indicated:
At December 31 ------------------------------ 2000 1999 1998 -------- -------- -------- (In Thousands) Securities available for sale: U.S. treasury securities ......................... $ -- $ -- $ 5,616 Obligations of U.S. government agencies .......... 97,812 90,744 69,540 Mortgage-backed securities ....................... 44,132 47,005 33,227 Obligations of state and political subdivisions... 18,910 10,536 8,200 Federal home loan bank stock ..................... 1,964 1,964 1,308 Equity securities ................................ 4,236 230 249 Other securities ................................. 820 584 638 -------- -------- -------- Total securities available for sale ........... 167,874 151,063 118,778 -------- -------- -------- Securities held to maturity: U.S. government agencies ......................... -- -- 2,500 Mortgage-backed securities ....................... -- -- 69 -------- -------- -------- Total securities held to maturity ............. -- -- 2,569 -------- -------- -------- Total investment and mortgage-backed securities .................................. $167,874 $151,063 $121,347 ======== ======== ========
13 Investment Portfolio Maturities. The following table sets forth certain information regarding carrying values, weighted average yields, and maturities of the Registrant's investment securities portfolio as of December 31, 2000. Actual maturities may differ from contractual maturities as certain instruments have call features which allow prepayment of obligations.
As of December 31, 2000 -------------------------------------------------------------------------------------------------------- After Five More than One Year or Less One to Five Years to Ten Years Ten Years Total Investment Securities ---------------- ----------------- ------------------ ------------------ --------------------------- Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market Value Yield Value Yield Value Yield Value Yield Value Yield Value ------- ------- ------- ------- ------- ------- ------- ------- -------- ------- ------ (Dollars in Thousands) Obligations of U.S. government agencies............. $6,986 5.81% $42,875 6.42% $34,046 6.91% $13,905 7.32% $ 97,812 6.67% $ 97,812 Mortgage-backed securities........... 9 9.03 -- -- 1,343 7.74 42,780 6.41 44,132 6.45 44,132 Obligations of state and political subdivisions (1)..... 821 5.39 120 5.48 4,596 5.34 13,373 5.18 18,910 5.23 18,910 Federal home loan bank stock........... -- -- -- -- -- -- 1,964 6.00 1,964 6.00 1,964 Equity securities...... -- -- -- -- -- -- 4,236 6.12 4,236 6.12 4,236 Other securities ..... -- -- 498 7.19 30 7.75 292 6.40 820 6.93 820 ------ ------- ------- ------- -------- -------- Total............. $7,816 5.77% $43,493 6.43% $40,015 6.76% $76,550 5.84% $167,874 6.21% $167,874 ====== ==== ======= ==== ======= ==== ======= ==== ======== ==== ========
- -------------------- (1) Average yields have not been computed on a tax-equivalent basis. 14 Sources of Funds General. Deposits are the major source of the Registrant's funds for lending and other investment purposes. In addition to deposits, the Registrant derives funds from the amortization, prepayment or sale of loans, maturities of investment securities and operations. Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and market conditions. The Registrant can also borrow from the Federal Home Loan Bank ("FHLB") of Pittsburgh. Deposits. Consumer and commercial deposits are attracted principally from within the Registrant's primary market area through the offering of a broad selection of deposit instruments including checking, regular savings, money market deposits, term certificate accounts and individual retirement accounts. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. The Registrant regularly evaluates the internal cost of funds, surveys rates offered by competing institutions, reviews the Registrant's cash flow requirements for lending and liquidity and executes rate changes when deemed appropriate. The Registrant does not obtain funds through brokers, nor does it solicit funds outside the Commonwealth of Pennsylvania. The following table indicates the amount of certificates of deposit of $100,000 or more by time remaining at December 31, 2000 (in thousands). Maturity Periods Certificates of ---------------- Deposit --------------- Three months or less $18,598 Over three through six months 6,150 Over six through twelve months 12,583 Over twelve months 9,612 ------ $46,943 ======= Borrowings. Deposits are the primary source of funds for the Registrant's lending and investment activities as well as for general business purposes. Should the need arise, the Registrant has a maximum borrowing capacity with the FHLB of $216.7 million. At December 31, 2000 there were outstanding $28.0 million of long term FHLB borrowings. Personnel As of December 31, 2000, the Registrant had 142 full-time and 66 part-time employees. None of the Registrant's employees are represented by a collective bargaining group. Regulation Set forth below is a brief description of certain laws which relate to the regulation of the Registrant and the Bank. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. Regulation of the Company General. The Company, as a bank holding company under the Bank Holding Company Act of 1956, as amended ("BHCA"), is subject to regulation and supervision by the Board of Governors of the Federal 15 Reserve System ("Federal Reserve") and by the Pennsylvania Department of Banking (the "Department"). The Company is required to file annually a report of its operations with, and is subject to examination by, the Federal Reserve and the Department. This regulation and oversight is generally intended to ensure that the Company limits its activities to those allowed by law and that it operates in a safe and sound manner without endangering the financial health of its subsidiary banks. Under the BHCA, the Company must obtain the prior approval of the Federal Reserve before it may acquire control of another bank or bank holding company, merge or consolidate with another bank holding company, acquire all or substantially all of the assets of another bank or bank holding company, or acquire direct or indirect ownership or control of any voting shares of any bank or bank holding company if, after such acquisition, the bank holding company would directly or indirectly own or control more than 5% of such shares. Federal statutes impose restrictions on the ability of a bank holding company and its nonbank subsidiaries to obtain extensions of credit from its subsidiary bank, on the subsidiary bank's investments in the stock or securities of the holding company, and on the subsidiary bank's taking of the holding company's stock or securities as collateral for loans to any borrower. A bank holding company and its subsidiaries are also prevented from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services by the subsidiary bank. A bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the policy of the Federal Reserve that a bank holding company should stand ready to use available resources to provide adequate capital to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve to be an unsafe and unsound banking practice or a violation of the Federal Reserve regulations, or both. Non-Banking Activities. The business activities of the Company, as a bank holding company, are restricted by the BHCA. Under the BHCA and the Federal Reserve's bank holding company regulations, the Company may only engage in, or acquire or control voting securities or assets of a company engaged in, (1) banking or managing or controlling banks and other subsidiaries authorized under the BHCA and (2) any BHCA activity the Federal Reserve has determined to be so closely related to banking or managing or controlling banks to be a proper incident thereto. These include any incidental activities necessary to carry on those activities, as well as a lengthy list of activities that the Federal Reserve has determined to be so closely related to the business of banking as to be a proper incident thereto. Financial Modernization. The Gramm-Leach-Bliley Act, which was enacted in November 1999 and most provisions of which became effective in March 2000 (the "Act"), permits greater affiliation among banks, securities firms, insurance companies, and other companies under a new type of financial services company known as a "financial holding company." A financial holding company essentially is a bank holding company with significantly expanded powers. Financial holding companies are authorized by statute to engage in a number of financial activities previously impermissible for bank holding companies, including securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; and merchant banking activities. The Act also permits the Federal Reserve and the Treasury Department to authorize additional activities for financial holding companies if they are "financial in nature" or "incidental" to financial activities. A bank holding company may become a financial holding company ("FHC") if each of its subsidiary banks is well capitalized, well managed, and 16 has at least a "satisfactory" CRA rating. A financial holding company must provide notice to the Federal Reserve within 30 days after commencing activities previously determined by statute or by the Federal Reserve and Department of the Treasury to be permissible. During fiscal 2000, the Company submitted notice to the Federal Reserve of its intent to be deemed a financial holding company. Regulation of the Bank General. As a Pennsylvania chartered, Bank Insurance Fund ("BIF") insured commercial bank, the Bank is subject to extensive regulation and examination by the Department and by the FDIC, which insures its deposits to the maximum extent permitted by law. The federal and state laws and regulations applicable to banks regulate, among other things, the scope of their business, their investments, the reserves required to be kept against deposits, the timing of the availability of deposited funds and the nature and amount of and collateral for certain loans. The laws and regulations governing the Bank generally have been promulgated to protect depositors and not for the purpose of protecting stockholders. This regulatory structure also gives the federal and state banking agencies extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulation, whether by the Department, the FDIC or the United States Congress, could have a material impact on the Company, the Bank and their operations. Pennsylvania Savings Bank Law. The Pennsylvania Banking Code ("Banking Code") contains detailed provisions governing the organization, location of offices, rights and responsibilities of trustees, officers, and employees, as well as corporate powers, savings and investment operations and other aspects of the Bank and its affairs. The Banking Code delegates extensive rule-making power and administrative discretion to the Department so that the supervision and regulation of state chartered commercial banks may be flexible and readily responsive to changes in economic conditions and in savings and lending practices. The Banking Code provides state chartered commercial banks with all of the powers enjoyed by federal savings and loan associations, subject to regulation by the Department. The Federal Deposit Insurance Corporation Act ("FDIA"), however, prohibits state chartered banks from making new investments, loans, or becoming involved in activities as principal and equity investments which are not permitted for national banks unless (1) the FDIC determines the activity or investment does not pose a significant risk of loss to the BIF and (2) the bank meets all applicable capital requirements. Accordingly, the additional operating authority provided to the Bank by the Banking Code is significantly restricted by the FDIA. Federal Deposit Insurance. The FDIC is an independent federal agency that insures the deposits, up to prescribed statutory limits, of federally insured banks and savings institutions and safeguards the safety and soundness of the banking and savings industries. The FDIC administers two separate insurance funds, the BIF, which generally insures commercial bank and state savings bank deposits, and the Savings Insurance Fund ("SAIF"), which generally insures savings association deposits. The Bank is a member of the BIF and its deposit accounts are insured by the FDIC, up to prescribed limits. The FDIC is authorized to establish separate annual deposit insurance assessment rates for members of the BIF and the SAIF, and to increase assessment rates if it determines such increases are appropriate to maintain the reserves of either insurance fund. In addition, the FDIC is authorized to levy emergency special assessments on BIF and SAIF members. The FDIC has set the deposit insurance assessment rates for BIF- member institutions for the first six months of 2001 at 0% to .027% of insured deposits on an annualized basis, with the assessment rate for most institutions set at 0%. 17 In addition, all insured institutions of the FDIC are required to pay assessments at an annual rate of approximately .0202% of insured deposits to fund interest payments on bonds issued by the Financing Corporation, an agency of the Federal government established to recapitalize the predecessor to the SAIF. These assessments will continue until the Financing Corporation bonds mature in 2017. Regulatory Capital Requirements. The FDIC has promulgated capital adequacy requirements for state-chartered banks that, like the Bank, are not members of the Federal Reserve System. At December 31, 2000, the Bank exceeded all regulatory capital requirements and was classified as "well capitalized." The FDIC's capital regulations establish a minimum 3% Tier I leverage capital requirement for the most highly-rated state-chartered, non-member banks, with an additional cushion of at least 100 to 200 basis points for all other state-chartered, non-member banks, which effectively increases the minimum Tier I leverage ratio for such other banks to 4% to 5%. Under the FDIC's regulation, the highest-rated banks are those that the FDIC determines are not anticipating or experiencing significant growth and have well diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and, in general, which are considered a strong banking organization, rated composite 1 under the Uniform Financial Institutions Rating System. Tier I or core capital is defined as the sum of common stockholders' equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, and minority interests in consolidated subsidiaries, minus all intangible assets other than certain purchased mortgage servicing rights and purchased credit and relationships. The FDIC's regulations also require that state-chartered, non-member banks meet a risk-based capital standard. The risk-based capital standard requires the maintenance of total capital (which is defined as Tier I capital and supplementary (Tier 2) capital) to risk weighted assets of 8%. In determining the amount of risk- weighted assets, all assets, plus certain off balance sheet assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in the type of asset or item. The components of Tier I capital for the risk-based standards are the same as those for the leverage capital requirement. The components of supplementary (Tier 2) capital include cumulative perpetual preferred stock, mandatory subordinated debt, perpetual subordinated debt, intermediate-term preferred stock, up to 45% of unrealized gains on equity securities and a bank's allowance for loan and lease losses. Allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital that may be included in total capital is limited to100% of Tier I capital. A bank that has less than the minimum leverage capital requirement is subject to various capital plan and activities restriction requirements. The FDIC's regulations also provide that any insured depository institution with a ratio of Tier I capital to total assets that is less than 2.0% is deemed to be operating in an unsafe or unsound condition pursuant to Section 8(a) of the FDIA and could be subject to potential termination of deposit insurance. The Bank is also subject to minimum capital requirements imposed by the Department on Pennsylvania-chartered depository institutions. Under the Department's capital regulations, a Pennsylvania bank or savings bank must maintain a minimum leverage ratio of Tier 1 capital (as defined under the FDIC's capital regulations) to total assets of 4%. In addition, the Department has the supervisory discretion to require a higher leverage ratio for any institutions based on the institution's substandard performance in any of a number of areas. The Bank was in compliance in both the FDIC and Pennsylvania capital requirements as of December 31, 2000. 18 Affiliate Transaction Restrictions. Federal laws strictly limit the ability of banks to engage in transactions with their affiliates, including their bank holding companies. Such transactions between a subsidiary bank and its parent company or the nonbank subsidiaries of the bank holding company are limited to 10% of a bank subsidiary's capital and surplus and, with respect to such parent company and all such nonbank subsidiaries, to an aggregate of 20% of the bank subsidiary's capital and surplus. Further, loans and extensions of credit generally are required to be secured by eligible collateral in specified amounts. Federal law also requires that all transactions between a bank and its affiliates be on terms as favorable to the bank as transactions with non-affiliates. Federal Home Loan Bank System. The Bank is a member of the FHLB of Pittsburgh, which is one of 12 regional FHLBs. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from funds deposited by member institutions and proceeds from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Trustees of the FHLB. As a member, the Bank is required to purchase and maintain stock in the FHLB of Pittsburgh in an amount equal to the greater of 1% of its aggregate unpaid residential mortgage loans, home purchase contracts or similar obligations at the beginning of each year or 5% of the Bank's outstanding advances from the FHLB. At December 31, 2000, the Bank was in compliance with this requirement. Federal Reserve System. The Federal Reserve requires all depository institutions to maintain non- interest bearing reserves at specified levels against their transaction accounts (primarily checking and NOW accounts) and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy the liquidity requirements that are imposed by the Department. At December 31, 2000, the Bank met its reserve requirements. Restrictions on Dividends. The Pennsylvania Banking Code states, in part, that dividends may be declared and paid only out of accumulated net earnings and may not be declared or paid unless surplus (retained earnings) is at least equal to contributed capital. The Bank has not declared or paid any dividends which cause the Bank's retained earnings to be reduced below the amount required. Finally, dividends may not be declared or paid if the Bank is in default in payment of any assessment due the FDIC. The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve's view that a bank holding company should pay cash dividends only to the extent that the holding company's net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company's capital needs, asset quality and overall financial condition. The Federal Reserve also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the federal prompt corrective action regulations, the Federal Reserve may prohibit a bank holding company from paying any dividends if the holding company's bank subsidiary is classified as "undercapitalized." 19 Item 2. Properties - ------------------- At December 31, 2000, the Registrant operated from its main office, five branch offices and five supermarket branch offices and a loan office and a trust office, all located in southwestern Pennsylvania. The total net book value of the Registrant's investment in premises and equipment at December 31, 2000, was approximately $4.9 million. The main office of the Company and of the Bank and two branch offices are owned by the Bank and the remaining three branch offices and five supermarket branch offices are leased by the Bank. These leases have initial terms of 1 to 20 years, and all leases contain renewal options for additional years. Item 3. Legal Proceedings - -------------------------- The Registrant is periodically involved as a plaintiff or defendant in various legal actions, such as actions to enforce liens, condemnation proceedings on properties in which the Registrant holds mortgage interests, matters involving the making and servicing of mortgage loans and other matters incident to the Registrant's business. In the opinion of management, none of these actions individually or in the aggregate is believed to be material to the financial condition or results of operations of the Registrant. Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------ No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2000. Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder - -------------------------------------------------------------------------------- Matters ------- The information contained under the section captioned "Stock Market Information" in the 1999 Annual Report to Stockholders (the "Annual Report") is incorporated herein by reference. Item 6. Selected Financial Data - -------------------------------- The information contained in the table captioned "Financial Highlights" in the Annual Report is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations ------------- The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report is incorporated herein by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk - -------------------------------------------------------------------- The information contained in the section captioned "Market Risk" in the Annual Report is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------- The Registrant's financial statements listed in Item 14 herein are incorporated herein by reference. 20 Item 9. Changes in and Disagreements with Accountants on Accounting and - -------------------------------------------------------------------------------- Financial Disclosure -------------------- None. Part III Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------ The information contained under the sections captioned "Section 16(a) Beneficial Ownership Reporting Compliance" and "Proposal I-- Election of Directors" and "-- Biographical Information" in the 2001 Proxy Statement are incorporated herein by reference. Item 11. Executive Compensation - -------------------------------- The information contained under the section captioned "Director and Executive Compensation" in the Proxy Statement is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ (a) Security Ownership of Certain Beneficial Owners Information required by this item is incorporated herein by reference to the Section captioned "Voting Securities and Principal Holders Thereof -- Security Ownership of Certain Beneficial Owners" of the Proxy Statement. (b) Security Ownership of Management Information required by this item is incorporated herein by reference to the sections captioned "Voting Securities and Principal Holders Thereof -- Security Ownership of Certain Beneficial Owners" and "Proposal I -- Election of Directors" of the Proxy Statement. (c) Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant. Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------- The information required by this item is incorporated herein by reference to the section captioned "Proposal I -- Election of Directors" and "Voting Securities and Principal Holders Thereof" of the Proxy Statement. 21 Part IV Item 14. Exhibits, Financial Statements, and Reports on Form 8-K - ----------------------------------------------------------------- (a) Listed below are all financial statements and exhibits filed as part of this report, and are incorporated by reference. 1. The consolidated statements of financial conditions of IBT Bancorp, Inc. and subsidiary as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three year period ended December 31, 2000, together with the related notes and the independent auditors' report of Edwards Sauer & Owens, independent accountants. 2. Schedules omitted as they are not applicable. 3. Exhibits
3(i) Articles of Incorporation of IBT Bancorp, Inc.* 3(ii) Bylaws of IBT Bancorp, Inc.* 10 Change In Control Severance Agreement with Charles G. Urtin** 10.1 Deferred Compensation Plan For Bank Directors** 10.2 Retirement Agreement Between Irwin Bank & Trust Co. And J. Curt Gardner** 10.3 Death Benefit Only Deferred Compensation Plan For Bank Directors effective as of January 1, 1990** 10.4 Retirement and Death Benefit Deferred Compensation Plan For Bank Directors effective as of January 1, 1990** 10.5 2000 Stock Option Plan*** 13 Portions of the Annual Report to Shareholders 21 Subsidiaries of IBT Bancorp, Inc. (see "Item 1 - Business") 23 Consent of Edwards, Sauer & Owens ------------------------- * Incorporated by reference to the identically numbered exhibits of the Registrant's Form 10 (file no. 0-25903) ** Incorporated by reference to the identically numbered exhibits of the Registrant's Form 10K for December 31, 1999. *** Incorporated by reference to the definitive proxy statement of the Registrant filed on March 17, 2000.
(b) None 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized as of March 16, 2001. IBT BANCORP, INC. By: /s/Charles G. Urtin ----------------------------------- Charles G. Urtin, President and Chief Executive Officer (Duly Authorized Representative) Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below on March 16, 2001 by the following persons on behalf of the registrant and in the capacities indicated.
/s/Richard L. Ryan /s/J. Curt Gardner - ------------------------------------------------ ------------------------------------------- Richard L. Ryan J. Curt Gardner Chairman of the Board Director /s/Charles G. Urtin - ------------------------------------------------ ------------------------------------------- Charles G. Urtin, President, Chief Executive Thomas Beter Officer, and Director Director (Principal Executive, Financial, and Accounting Officer) - ------------------------------------------------ ------------------------------------------- William D. Fawcett Edwin A. Paulone Director Director /s/Grant J. Shevchik - ------------------------------------------------ ------------------------------------------- Robert Rebich, Jr. Grant J. Shevchik Director Director /s/Robert C. Whisner /s/Robert Bowell - ------------------------------------------------ ------------------------------------------- Robert C. Whisner Robert Bowell Director Executive Vice President, Secretary and Treasurer
EX-13 2 0002.txt EXHIBIT 13 EXHIBIT 13 SELECTED FINANCIAL INFORMATION IBT BANCORP, INC & SUBSIDIARY
At or for the Years Ended December 31, ------------------------------------------------------------------------ 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (Dollars in thousands, except per share amounts) Selected Balance Sheet Data: Assets $ 496,379 $ 445,721 $ 412,366 $ 366,457 $ 331,416 Cash and cash equivalents 21,746 19,264 43,396 27,700 24,853 Securities available for sale 167,874 151,063 118,778 107,801 95,343 Securities held to maturity - - 2,569 5,855 7,955 Loans receivable (net) 291,914 260,502 238,304 216,487 194,677 Deposits 409,638 368,680 356,383 324,317 292,699 Repurchase agreements 9,022 6,457 - - - Federal funds purchased - 7,000 - - - FHLB advances 28,000 22,000 14,000 4,000 4,000 Shareholders' equity 44,615 37,905 38,201 34,302 30,090 Selected Results of Operations Interest income 33,787 29,731 27,768 25,349 22,695 Net interest income 17,200 16,087 15,182 13,832 12,505 Provision for loan losses 300 300 300 300 410 Net interest income after provision for loan losses 16,900 15,787 14,882 13,532 12,095 Other income 2,946 2,764 2,093 1,733 1,471 Other expense 10,181 9,233 8,438 7,683 7,076 Net income 6,705 6,336 5,801 5,193 4,458 Per Share Data: Net Income Basic $ 2.23 $ 2.10 $ 1.92 $ 1.72 $ 1.47 Diluted 2.23 2.10 1.92 1.72 1.47 Cash dividends declared 0.92 0.80 0.64 0.51 0.42 Selected Ratios: Return on average assets 1.44% 1.49% 1.54% 1.52% 1.44% Return on average equity 16.87 16.54 15.97 16.27 15.82 Ratio of average equity to average assets 8.52 8.99 9.63 9.84 9.61 Dividend payout 41.26 38.10 33.33 29.65 25.57
-1- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words "believes", "anticipate", "contemplates", "expects", and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Those risks and uncertainties include changes in interest rates, risks associated with the effect of opening a new branch, the ability to control costs and expenses, and general economic conditions. IBT Bancorp, Inc. undertakes no obligation to publicly release the results of any revisions to those forward looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. GENERAL IBT Bancorp, Inc. is a bank holding company headquartered in Irwin, Pennsylvania, which provides a full range of commercial and retail banking services through its wholly owned banking subsidiary, Irwin Bank & Trust Co. (collectively, the "Company"). FINANCIAL CONDITION At December 31, 2000, total assets increased $50.7 million, or 11.4%, to $496.4 million from $445.7 million at December 31, 1999. Of this increase, securities available for sale increased $16.8 million, net loans receivable increased $31.4 million, federal funds sold increased $4.1 million, and interest-bearing deposits in banks increased $4.6 million. Increases in federal funds sold and interest-bearing deposits in banks will be used to meet anticipated future loan demand. Such increases in assets were primarily offset by a decrease of $6.3 million in cash and due from banks. The decrease in cash and due from banks was used to pay off, in the first quarter of 2000, federal funds purchased of $7.0 million, that were outstanding at December 31, 1999. The growth in total deposits of $40.9 million was used primarily to fund the growth in the loan and securities available for sale portfolio. The increase in the loan portfolio was primarily due to the growth of the fixed rate one-to four-family mortgage loan, commercial mortgage, and commercial portfolio of $8.2 million, $9.4 million, and $5.4 million, respectively. Such increases were partially offset by the sale of the credit card portfolio of $1.8 million in the second quarter of fiscal 2000. The Company's loan portfolio continues to grow due to the Company's offering of competitive market interest rates. The increase of $16.8 million in investment securities available for sale was mainly attributable to sales of $6.2 million, proceeds from maturities of securities of $12.0 million, purchases of $30.0 million, and an increase in market value (before tax) of $5.0 million. At December 31, 2000, total liabilities increased $44.0 million, or 10.7%, to $451.8 million from $407.8 million at December 31, 1999. The increase primarily related to the increase in total deposits of $40.9 million. Of this increase, Interest-bearing deposits increased $33.7 million to $345.3 million at December 31, 2000 from $311.6 million at December 31, 1999. The most significant areas of increase were in the Certificate of Deposit accounts which reached $205.3 million at December 31, 2000, an increase of $36.4 million from $168.9 million at December 31, 1999. Customers continue to be attracted to this product due to the competitive interest rates paid for these products. -2- Non interest-bearing deposits increased $7.2 million to $64.3 million at December 31, 2000 from $57.1 million at December 31, 1999. Such increases reflect additions to non-interest bearing deposits of $16.2 million offset by $9.0 million in investments in repurchase agreements. Under the terms of the agreement, deposits in designated demand accounts of the customer are put into a investment vehicle which is used daily to purchase an interest in designated U.S. Government or Agencies' securities. The Company in turn agrees to repurchase these investments on a daily basis and pay the customers the daily interest earned based on the current market rate. At December 31, 2000, the amount of repurchase agreements totaled $9.0 million. See Note 6 to the consolidated financial statements. At December 31, 2000, total stockholders' equity increased $6.7 million to $44.6 million from $37.9 million at December 31, 1999. The increase was primarily due to a $3.3 million increase in accumulated other comprehensive income and net income of $6.7 million for the period, offset by dividends paid of $2.8 million. The Company has repurchased 22,000 shares of stock at an average cost of approximately $31 per share. During fiscal 2001, based on the availability, the Company plans to repurchase up to 129,000 of its shares. Accumulated other comprehensive income increased as a result of changes in the net unrealized gain on the available for sale securities due to fluctuations in interest rates. Pursuant to generally accepted accounting principles, securities available for sale are recorded at current market value and net unrealized gains or losses on such securities are excluded from current earnings and reported net of income taxes, as part of comprehensive income, until realized. Because of interest rate volatility, the Company's accumulated other comprehensive income could materially fluctuate for each interim period and year-end. The majority of the increase in accumulated other comprehensive income resulted from the Company's investment in U.S. Government agencies and municipals available for sale. See Note 2 to the consolidated financial statements. ANALYSIS OF NET INTEREST INCOME The Company's results of operations are primarily dependent on its net interest income, which is the difference between the interest income earned on assets, primarily loans and investments, and the interest expense on liabilities, primarily deposits and borrowings. Net interest income may be affected significantly by general economic and competitive conditions and policies of regulatory agencies, particularly those with respect to market interest rates. The results of operations are also influenced by the level of non-interest expenses, such as employee salaries and benefits and other income, such as loan-related fees and fees on deposit-related services. -3- RESULTS OF OPERATIONS Net Income: Net income increased approximately $369,000, or 5.8%, to $6.7 million for the year ended December 31, 2000 from $6.3 million for the year ended December 31, 1999. At December 31, 1999, net income increased approximately $535,000, or 9.2%, to $6.3 million from $5.8 million for the year ended December 31, 1998. The increase in net income for 2000 and 1999 was primarily attributable to the increases in the average balances of interest earning assets of $37.6 million and $49.4 million, respectively. Net Interest Income: Net interest income is the most significant component of the Company's income from operations. Net interest income is the difference between interest received on interest-earning assets (primarily loans and investment securities) and interest paid on interest-bearing liabilities (primarily deposits and borrowed funds). Net interest income depends on the volume and rate earned on interest-earning assets and the volume and interest rate paid on interest-bearing liabilities. Net interest income increased $1.1 million, or 6.8%, to $17.2 million for 2000 compared to $16.1 million for 1999. The increase was primarily due to the increase in average loans of $27.8 million and average investment securities available for sale of $14.9 million coupled with a 30 basis point increase in the yield on average interest earning assets to 7.59% for 2000 from 7.29% for 1999. The increase in the yield on average interest earning assets was primarily the result of yield increases in average loans and average investment securities of 21 basis points and 28 basis points, respectively. Such increases were the result of loans and investments being made at higher interest rates. The increase in average loans and average investment securities available for sale were partially funded by the increase in average interest bearing liabilities of $34.0 million. Offsetting the increase in net interest income was a 43 basis point increase in average cost of funds to 4.58% for 2000 from 4.15% for 1999. The yield on average interest bearing liabilities increased mainly due to the increase in the average balance in certificates of deposit and other liabilities coupled with higher interest rates being paid on total deposit products and other liabilities. Net interest income increased $900,000, or 5.9%, to $16.1 million for 1999 compared to $15.2 million for 1998. The increase was primarily due to the increase in average loans of $24.6 million and average investment securities available for sale of $30.4 million coupled with a 27 basis point decrease in average cost of funds to 4.15% for 1999 from 4.42% for 1998. The increase in average loans and average investment securities available for sale were partially funded by the increase in average interest bearing liabilities of $43.7 million. Offsetting the increase in net interest income was a 46 basis point decline in the yield on average interest earning assets to 7.29% for 1999 from 7.75% for 1998. The yield on average interest earning assets declined for 1999 due to a decrease in yields on loans receivable to 7.95% for 1999 from 8.48% for 1998, which was the result of loans refinancing at lower rates. The following table sets forth certain information relating to the Company's average balance sheet and, reflects the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are derived for daily balances. -4-
Year Ended December 31, ------------------------------------------------------------------------------------------------------------ 2000 1999 1998 ------------------------------------------------------------------------------------------------------------ Average Average Average Average Yield/ Average Yield/ Average Yield/ Balance Interest Cost Balance Interest Cost Balance Interest Cost ------------------------------------------------------------------------------------------------------------ (Dollars in thousands) Interest- earning assets: Loans receivable (1) (7) $ 279,400 $ 22,808 8.16% $ 251,574 $ 20,000 7.95% $226,984 $ 19,259 8.48% Investment securities available for sale (2) 159,394 10,578 6.64 144,544 9,195 6.36 114,078 7,606 6.67 Investment securities held to maturity - - - 1,208 36 2.98 3,228 143 4.43 Other interest- earning assets (5) 6,464 401 6.20 10,319 500 4.85 13,956 760 5.45 Total interest earning assets $ 445,258 $ 33,787 7.59 $ 407,645 $ 29,731 7.29 $358,246 $ 27,768 7.75 ========= ========= ==== ========= ========= ==== ======== ======== ==== Non-interest earning assets 21,558 18,655 19,033 -------- -------- -------- Total assets $466,816 $426,300 $377,279 ======== ======== ======== Interest-bearing liabilities: Money market accounts 56,079 2,275 4.06% 56,731 2,069 3.65% 47,023 1,864 3.96% Certificates of Deposit 182,465 10,364 5.68 162,668 8,418 5.17 149,598 8,322 5.56 Other liabilities 123,928 3,949 3.19 109,061 3,157 2.89 88,180 2,400 2.72 --------- --------- ---- --------- --------- ---- -------- -------- ---- Total interest- bearing liabilities $ 362,472 $ 16,588 4.58% $ 328,460 $ 13,644 4.15% $284,801 $ 12,586 4.42% ========= ========= ==== ========= ========= ==== ======== ======== ==== Non-interest- bearing liabilities 64,591 59,530 56,150 --------- --------- -------- Total liabilities $ 427,063 $ 387,990 $340,951 ========= ========= ======== Retained Earnings (6) 39,753 38,310 36,328 --------- --------- -------- Total liabilities and stockholders' equity $ 466,816 $ 426,300 $377,279 ========= ========= ======== Net interest income $ 17,199 $ 16,087 $ 15,182 ========= ========= ======== Interest rate spread (3) 3.01% 3.14% 3.33% ====== ====== ====== Net yield on interest- earning assets (4) 3.86% 3.95% 4.24% ====== ====== ====== Ratio of average interest- earning assets to average interest- bearing liabilities 122.84% 124.11% 125.79% ====== ====== ======
(1) Average balances include non-accrual loans, and are net of deferred loan fees. (2) Includes interest-bearing deposits in other financial institutions. (3) Interest-rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (4) Net yield on interest-earning assets represents net interest income as a percentage of average interest earning assets. (5) Includes federal funds sold. (6) Includes capital stock, surplus and unrealized holding gains on SFAS 115 AFS securities. (7) For all years presented, interest income includes business manager income, which was previously classified as other non-interest income. -5- The following table shows the effect of changes in volumes and rates on interest income and interest expense. The changes in interest income and interest expense attributable to changes in both volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate. Tax exempt income was not recalculated on a tax equivalent basis due to the immateriality of the change to the table resulting from a recalculation.
Year Ended December 31, Year Ended December 31, ---------------------------- ----------------------------- 2000 vs. 1999 1999 vs. 1998 ---------------------------- ----------------------------- Increase (Decrease) Increase (Decrease) Due to Due to ---------------------------- ----------------------------- Volume Rate Net Volume Rate Net ------ ---- --- ------ ---- --- (In Thousands) (In Thousands) Interest income: Loans receivable $2,212 $ 596 $2,808 $2,086 $(1,345) $ 741 Investment securities available for sale 945 438 1,383 2,031 (442) 1,589 Investment securities held to maturity (36) - (36) (89) (18) (107) Other interest earning assets (187) 88 (99) (198) (62) (260) ------ ------ ------ ------ ------- ------ Total interest-earning assets 2,934 1,122 4,056 3,830 (1,867) 1,963 ------ ------ ------ ------ ------- ------ Interest expense: Money market accounts (24) 230 206 385 (180) 205 Certificates of deposit 1,024 922 1,946 727 (631) 96 Other liabilities 430 362 792 568 189 757 ------ ------ ------ ------ ------- ------ Total interest-bearing liabilities 1,430 1,514 2,944 1,680 (622) 1,058 ------ ------ ------ ------ ------- ------ Net change in interest income $1,504 $ (392) $1,112 $2,150 $(1,245) $ 905 ====== ====== ====== ====== ======= ======
Provision for Loan Losses: The Company recorded a provision for loan losses of $300,000 for 2000, 1999, and 1998. The evaluation for determining the provision includes evaluations of concentrations of credit, past loss experience, current economic conditions, amount and composition of the loan portfolio (including loans being specifically monitored by management), estimated fair value of underlying collateral, loan commitments outstanding, delinquencies, and other information available at such times. The Company will continue to monitor its allowance for loan losses and make future adjustments to the allowance through the provision for loan losses as economic conditions dictate. Although the Company maintains its allowance for loan losses at a level that it considers to be adequate to provide for the inherent risk of loss in its loan portfolio, there can be no assurance that future losses will not exceed estimated amounts or that additional provisions for loan losses will not be required in future periods due to the higher degree of credit risk which might result from the change in the mix of the loan portfolio. Other Income: Total other income increased approximately $182,000, or 6.6%, to $2.9 million for the year ended December 31, 2000 from $2.8 million for the year ended December 31, 1999. The increases were the result of service fees and debit card fees totaling $282,000, $115,000 gain from the sale of the credit card portfolio, offset by investment security losses of $107,000. The increase in service fees resulted from an increase in overdraft fees due to a larger deposit base from the prior year. The increase in debit card fees resulted from increased customer usage. -6- For the year ended December 31, 1999, total other income increased approximately $671,000, or 32.0%, to $2.8 million from $2.1 million for the year ended December 31, 1998. This increase was primarily the result of overdraft service charges on deposit accounts, a larger deposit base, and ATM surcharges assessed on non-customers of Irwin Bank. The Company began to assess ATM surcharges in January 1999. Other Expenses: Total other expenses increased approximately $1.0 million, or 10.9%, to $10.2 million for 2000 from $9.2 million for 1999. This increase was primarily the result of an increase in salaries of approximately $500,000 to $4.1 million for 2000 from $3.6 million for 1999. As previously disclosed, the Company instituted an across the board salary increase to all non-officer employees and eliminated the bonus reward program for non-officer employees in January 2000. Pension and other employee benefits increased approximately $61,000 to $1.1 million for 2000 from $1.0 million for 1999 a result of increases in health insurance premiums. Data processing and ATM expenses increased $89,000 to $1.0 million in 2000 from $900,000 in 1999. Such increases were a result of increased fees from the Company's processors. Other expenses increased $200,000 to $3.0 million for 2000 from $2.8 million for 1999. The increase in other expenses includes approximately $76,000 in aggregate net losses from the Company's investments in IB&T Financial Services, LLC ("IB&T Financial") and T.A. of Irwin, L.P.. The investment in IB&T Financial will be dissolved in the second quarter of 2001. Total other expenses increased approximately $800,000, or 9.5%, to $9.2 million for 1999 from $8.4 million for 1998. This increase was the result of pension and other employee benefits increasing $176,000 to $995,000 for 1999 from $819,000 for 1998. During 1999, pension expense increased due to the Company's change in accrual assumptions regarding the funding of the plan. ATM expense increased $49,000 to $348,000 for 1999 from $299,000 for 1998 due to the increase of seven additional automated teller machines during fiscal 1998. Other expenses increased $500,000 to $2.8 million for 1999 from $2.3 million for 1998, primarily as a result of normal costs in running a public company. It should be noted that salaries remained relatively unchanged in 1999 as compared to 1998 primarily due to the retirement on January 1, 1999 of two key officers of the Company. -7- LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds include savings, deposits, loan repayments and prepayments, cash from operations and borrowing from the Federal Home Loan Bank. The Company uses its capital resources principally to fund loan originations and purchases, repay maturing borrowings, purchase investments, and for short-term liquidity needs. The Company expects to be able to fund or refinance, on a timely basis, its commitments and long-term liabilities. As of December 31, 2000, the Company had commitments to extend credit of $58.4 million. The Company's liquid assets consist of cash and cash equivalents, which include investments in short-term investments. The levels of these assets are dependent on the Company's operating, financing, and investment activities during any given period. At December 31, 2000, cash and cash equivalents totaled $21.7 million Net cash from operating activities for 2000 totaled $7.3 million, as compared to $6.5 million for 1999 and $5.9 million for 1998. Net cash used by investing activities for 2000 totaled $44.0 million, as compared to cash used of $61.8 million for 1999 and $30.3 million for 1998. The decrease of $17.8 million for 2000 was mainly attributed to net decreases in purchases of available for sale securities. Net cash used to purchase available for sale securities for 2000 decreased $26.0 million. Net cash used to purchase available for sale securities for 1999 totaled $27.1 million. The decrease of $2.2 million for 1998 was mainly attributed to a net decrease in purchases of investment securities available for sale. Net cash from financing activities for the year ended December 31, 2000 totaled $39.2 million, as compared to cash from financing activities of $31.2 million for 1999 and $40.1 million for 1998. The $8.0 million increase in cash from financing activities for 2000 was a result of a $28.7 million increase in deposits offset by a decrease of $3.9 million in securities sold under agreements to repurchase and a $7.0 million decrease in federal funds purchased. The $8.8 million decrease in cash from financing activities for 1999 was a result of a $19.8 million decrease in deposits and repayment of $2.0 million in long-term debt. Offsetting such decrease was the introduction of securities sold under agreements to repurchase totaling $6.5 million and federal funds purchased which totaled $7.0 million for the year ended December 31, 1999. Liquidity may be adversely affected by unexpected deposit outflows, excessive interest rates paid by competitors, and similar matters. Management monitors projected liquidity needs and determines the level desirable, based in part on the Company's commitment to make loans and management's assessment of the Company's ability to generate funds. The Company is also subject to federal regulations that impose certain minimum capital requirements. -8- MARKET RISK Market risk is the risk of loss from adverse changes in market prices and rates. The Company's market risk arises primarily from interest rate risk inherent in its lending, investment and deposit taking activities. The Company's profitability is affected by fluctuations in interest rates. A sudden and substantial increase in interest rates may adversely impact the Company's earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent or on the same basis. To that end, management actively monitors and manages its interest rate risk exposure. The principle objective of the Company's interest rate risk management is to evaluate the interest rate risk inherent in certain balance sheet accounts, determine the level of risk appropriate given the Company's business strategy, operating environment, capital and liquidity requirements, and performance objectives, and mange the risk consistent with the Board of Directors' approved guidelines. Through such management, the Company seeks to minimize the vulnerability of its operations to changes in interest rates. The Company's Asset/Liability Committee is comprised of the Company's senior management under the direction of the Board of Directors, with senior management responsible for reviewing with the Board of Directors its activities and strategies, the effect of those strategies on the company's net interest margin, the market value of the portfolio and the effect that changes in interest rates will have on the Company's portfolio and the Company's exposure limits. The Company utilizes the following strategies to manage interest rate risk: o When market conditions permit, to originate and hold in its portfolio adjustable rate loans; o Sell fixed rate mortgage loans that conform to Federal National Mortgage Association guidelines when sales can be achieved on terms favorable to the Company; o Lengthen the maturities of its liabilities when deemed cost effective through the utilization of Federal Home Loan Bank advances; o Purchase mortgage-backed securities for the available for sale securities portfolio with cash flows that can be reinvested in higher earning instruments when interest rates rise; and o Generally, maintain securities in the available for sale portfolio that are short term to offset the risk of long term fixed rate mortgage loans in a rising rate environment. -9- The following table shows the Company's financial instruments that are sensitive to changes in interest rates, categorized by expected maturity or repricing maturity, and the instruments' fair values at December 31, 2000. Market risk sensitive instruments are generally defined as those instruments that can be adversely impacted by changes in market interest rates. The Company currently does not participate in hedging programs, interest rate swaps or other activities involving the use of off-balance sheet derivative financial instruments, but may do so in the future to mitigate interest rate risk. Expected maturities are contractual maturities adjusted for prepayments of principle. The Company uses certain assumptions to estimate fair values and expected maturities. For asset, expected maturities are based upon contractual maturity, call dates and projected repayments of principle. For interest earning assets, no prepayments are assumed. For interest bearing liabilities, negotiable order of withdrawal ("NOW") accounts, money market accounts, and similar interest bearing demand accounts are subject to immediate withdrawal or repricing and are therefore presented in the earliest period in the table. Expected Maturity/Principal Repayment at December 31,
Total Book Fair 2001 2002 2003 2004 2005 Thereafter Value Value ------- ------- ------- ------- ------- ------- ------- ------- (Dollars in thousands) Interest-earning assets - ----------------------- Mortgage loans $ 6,732 $10,276 $ 7,191 $ 7,493 $7,966 $113,095 $152,753 $149,406 Home equity loans, second mortgage loans, student loans, other loans 20,147 11,709 10,330 7,888 6,564 25,999 82,637 85,284 Commercial loans, municipal loans 12,575 4,480 3,477 2,835 1,870 33,384 58,621 58,997 Investment securities available for sale 7,827 13,996 9,070 13,953 6,237 114,540 165,623 165,910 Interest-bearing liabilities - ---------------------------- NOW and other transaction accounts 11,786 - - - - - 11,786 11,786 Money market and other savings accounts 127,934 - - - - - 127,934 127,934 Certificates of deposit 140,949 39,282 14,815 3,824 3,273 3,193 205,336 207,589 Federal home loan bank of Pittsburgh advances 6,000 2,000 - 10,000 - 10,000 28,000 28,968
-10- [LOGO] Certified Public Accountants & Business Advisors EDWARDS ------------------------------------------------------------ SAUER & 500 Warner Centre, 332 Fifth Avenue, Pittsburgh, PA 15222 OWENS Phone: 412-281-9211 Fax: 412-281-2407 A Professional Corporation www. esocpa.com INDEPENDENT AUDITORS' REPORT To the Board of Directors IBT Bancorp, Inc. Irwin, Pennsylvania We have audited the accompanying consolidated balance sheets of IBT Bancorp, Inc. (the Bancorp), and subsidiary as of December 31, 2000 and 1999 and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These consolidated financial statements are the responsibility of the Bancorp's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our 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 financial position of IBT Bancorp, Inc. and subsidiary as of December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. /s/Edwards Sauer & Owens Pittsburgh, Pennsylvania February 1, 2001 -11- CONSOLIDATED BALANCE SHEETS IBT BANCORP, INC. AND SUBSIDIARY - --------------------------------------------------------------------------------
December 31, ------------------------------ 2000 1999 ------------- ------------- ASSETS Cash and due from banks $ 12,877,327 $ 19,171,977 Interest-bearing deposits in banks 4,740,068 92,590 Federal funds sold 4,129,000 - Certificates of deposit 2,700,000 3,000,000 Securities available for sale 165,909,886 149,098,906 Federal Home Loan Bank stock, at cost 1,964,300 1,964,300 Loans, net of allowance for loan losses of $1,919,327 in 2000 and $2,365,874 in 1999 291,914,060 260,502,270 Premises and equipment, net 4,899,777 4,728,702 Other assets 7,245,015 7,162,670 ------------- ------------- Total Assets $ 496,379,433 $ 445,721,415 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits Non-interest bearing $ 64,316,265 $ 57,097,999 Interest-bearing 345,322,197 311,582,486 ------------- ------------- Total deposits 409,638,462 368,680,485 Repurchase agreements 9,022,190 6,456,597 Federal funds purchased - 7,000,000 Accrued interest and other liabilities 5,104,200 3,679,053 Long-term debt 28,000,000 22,000,000 ------------- ------------- Total liabilities 451,764,852 407,816,135 Stockholders' Equity Capital stock, par value $1.25, 50,000,000 shares authorized, 3,023,799 shares issued, 3,001,923 and 3,021,174 shares outstanding at December 31, 2000 and December 31, 1999, respectively 3,779,749 3,779,749 Surplus 2,073,102 2,073,102 Retained earnings 39,261,880 35,318,637 Accumulated other comprehensive income 189,326 (3,178,596) ------------- ------------- 45,304,057 37,992,892 Less: Treasury stock, at cost (689,476) (87,612) ------------- ------------- Total stockholders' equity 44,614,581 37,905,280 ------------- ------------- Total Liabilities and Stockholders' Equity $ 496,379,433 $ 445,721,415 ============= =============
The accompanying notes are an integral part of these consolidated financial statements. -12- CONSOLIDATED STATEMENTS OF INCOME IBT BANCORP, INC. AND SUBSIDIARY - --------------------------------------------------------------------------------
Years ended December 31, -------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ Interest Income Loans, including fees $ 22,807,718 $ 19,999,321 $ 19,259,384 Investment securities 10,578,510 9,231,496 7,748,537 Federal funds sold 400,886 499,811 760,495 ------------ ------------ ------------ Total interest income 33,787,114 29,730,628 27,768,416 Interest Expense Deposits 14,603,671 12,473,855 12,174,469 Long-term debt 1,586,859 974,405 411,647 Repurchase agreements 362,684 191,193 - Federal funds purchased 34,354 4,135 - ------------ ------------ ------------ Total interest expense 16,587,568 13,643,588 12,586,116 ------------ ------------ ------------ Net Interest Income 17,199,546 16,087,040 15,182,300 Provision for Loan Losses 300,000 300,000 300,000 ------------ ------------ ------------ Net Interest Income after Provision for Loan Losses 16,899,546 15,787,040 14,882,300 Other Income (Losses) Service fees 1,645,913 1,497,861 1,190,223 Investment security gains - 53,194 61,312 Investment security losses (106,974) (29,687) (20,901) Debit card fees 401,080 266,079 162,107 Other income 1,006,422 976,619 700,567 ------------ ------------ ------------ Total other income 2,946,441 2,764,066 2,093,308 Other Expenses Salaries 4,084,817 3,566,947 3,573,257 Pension and other employee benefits 1,056,116 994,960 818,669 Occupancy expense 1,020,734 949,662 903,112 Data processing expense 588,193 535,108 505,484 ATM expense 383,935 348,414 298,843 Other expenses 3,047,492 2,837,870 2,338,737 ------------ ------------ ------------ Total other expenses 10,181,287 9,232,961 8,438,102 ------------ ------------ ------------ Income Before Income Taxes 9,664,700 9,318,145 8,537,506 Provision for Income Taxes 2,959,439 2,982,391 2,736,576 ------------ ------------ ------------ Net income $ 6,705,261 $ 6,335,754 $ 5,800,930 ============ ============ ============ Basic Earnings per Share $ 2.23 $ 2.10 $ 1.92 ============ ============ ============ Diluted Earnings per Share $ 2.23 $ 2.10 $ 1.92 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. -13- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY IBT BANCORP, INC. AND SUBSIDIARY Years Ended December 31, 2000, 1999 and 1998 - --------------------------------------------------------------------------------
Accumulated Other Capital Retained Comprehensive Treasury Stock Surplus Earnings Income Stock Total --------------- ---------------- --------------- ---------------- --------------- ------------- Balance at December 31, 1997 $ 1,200,000 $ 2,400,000 $ 29,792,223 $ 909,635 $ - $ 34,301,858 Comprehensive Income Net income 5,800,930 5,800,930 Other comprehensive income, net of tax: Change in net unrealized holding gains on securities available for sale, net of deferred income tax of $43,853 85,127 85,127 Less: reclassification adjustment, net of deferred income tax benefit of $25,039 (48,606) (48,606) ------------- 36,521 ------------- Total Comprehensive Income 5,837,451 Cash dividends ($0.64) (1,938,380) (1,938,380) 5% stock dividend 59,916 2,192,935 (2,252,851) Three-for-one stock split 2,519,833 (2,519,833) --------------- ---------------- --------------- ---------------- --------------- ------------- Balance at December 31, 1998 $ 3,779,749 $ 2,073,102 $ 31,401,922 $ 946,156 $ - $ 38,200,929
The accompanying notes are an integral part of these consolidated financial statements. -14- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (CONTINUED) IBT BANCORP, INC. AND SUBSIDIARY Years Ended December 31, 2000, 1999 and 1998 - --------------------------------------------------------------------------------
Accumulated Other Capital Retained Comprehensive Treasury Stock Surplus Earnings Income Stock Total ---------------- ---------------- ----------------- --------------- -------------- --------------- Balance at December 31, 1998 $ 3,779,749 $ 2,073,102 $ 31,401,922 $ 946,156 $ - $ 38,200,929 Comprehensive Income Net income 6,335,754 6,335,754 Other comprehensive income, net of tax: Change in net unrealized holding gains on securities available for sale, net of deferred income tax benefit of $2,034,128 (3,948,601) (3,948,601) Less: reclassification adjustment, net of deferred income tax benefit of $90,744 (176,151) (176,151) ------------- (4,124,752) ------------- Total Comprehensive Income 2,211,002 Cash dividends ($0.80) (2,419,039) (2,419,039) Purchase of Treasury Stock (87,612) (87,612) ---------------- ---------------- ----------------- --------------- -------------- -------------- Balance at December 31, 1999 $ 3,779,749 $ 2,073,102 $ 35,318,637 $ (3,178,596) $ (87,612) $ 37,905,280
The accompanying notes are an integral part of these consolidated financial statements. -15- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY (CONTINUED) IBT BANCORP, INC. AND SUBSIDIARY Years Ended December 31, 2000, 1999 and 1998 - --------------------------------------------------------------------------------
Accumulated Other Capital Retained Comprehensive Treasury Stock Surplus Earnings Income Stock Total ------------------ ----------------- ---------------- ---------------- ------------- -------------- Balance at December 31, 1999 $ 3,779,749 $ 2,073,102 $ 35,318,637 $ (3,178,596) $ (87,612) $ 37,905,280 Comprehensive Income Net income 6,705,261 6,705,261 Other comprehensive income, net of tax: Change in net unrealized holding gains on securities available for sale, net of deferred income tax of $1,722,575 3,343,822 3,343,822 Less: reclassification adjustment, net of deferred income tax of $12,415 24,100 24,100 -------------- 3,367,922 -------------- Total Comprehensive Income 10,073,183 Cash dividends ($0.92) (2,762,018) (2,762,018) Purchase of Treasury Stock (601,864) (601,864) ------------------ ----------------- ---------------- ---------------- ------------- -------------- Balance at December 31, 2000 $ 3,779,749 $ 2,073,102 $ 39,261,880 $ 189,326 $ (689,476) $ 44,614,581 ================= ================ =============== =============== ============ =============
The accompanying notes are an integral part of these consolidated financial statements. -16- CONSOLIDATED STATEMENTS OF CASH FLOWS IBT BANCORP, INC. AND SUBSIDIARY - --------------------------------------------------------------------------------
Years ended December 31, -------------------------------------------- 2000 1999 1998 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 6,705,261 $ 6,335,754 $ 5,800,930 Adjustments to reconcile net cash from operating activities: Depreciation 528,335 499,068 482,000 Net amortization/accretion of premiums and discounts (9,800) 20,934 971 Net investment security losses (gains) 106,974 (23,507) (40,411) Provision for loan losses 300,000 300,000 300,000 Increase (decrease) in cash due to changes in assets and liabilities: Other assets (1,610,223) (566,193) (598,713) Accrued interest and other liabilities 1,327,616 (102,823) (56,069) ------------ ------------ ------------ Net Cash From Operating Activities 7,348,163 6,463,233 5,888,708 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of certificates of deposit (2,700,000) (3,000,000) - Proceeds from maturity of certificates of deposit 3,000,000 - - Proceeds from sales of securities available for sale 6,153,348 7,579,149 2,166,459 Proceeds from maturities of securities held to maturity - 2,569,215 3,285,760 Proceeds from maturities of securities available for sale 12,000,998 50,293,783 48,173,553 Purchase of securities available for sale (29,959,587) (95,748,942) (61,085,311) Net loans made to customers (31,821,372) (22,530,641) (22,289,232) Purchases of premises and equipment (699,410) (348,637) (433,875) Purchase of Federal Home Loan Bank stock - (656,200) (137,400) ------------ ------------ ------------ Net Cash Used By Investing Activities (44,026,023) (61,842,273) (30,320,046) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 40,957,977 12,297,347 32,065,713 Net increase in securities sold under agreements to repurchase 2,565,593 6,456,597 - Net (decrease) increase in federal funds purchased (7,000,000) 7,000,000 - Dividends (2,762,018) (2,419,039) (1,938,380) Proceeds from long-term debt 7,000,000 10,000,000 10,000,000 Repayment of long-term debt (1,000,000) (2,000,000) - Purchase of treasury stock (601,864) (87,612) - ------------ ------------ ------------ Net Cash From Financing Activities 39,159,688 31,247,293 40,127,333 ------------ ------------ ------------ Net Change in Cash and Cash Equivalents 2,481,828 (24,131,747) 15,695,995 Cash and Cash Equivalents at Beginning of Year 19,264,567 43,396,314 27,700,319 ------------ ------------ ------------ Cash and Cash Equivalents at End of Year $ 21,746,395 $ 19,264,567 $ 43,396,314 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. -17- CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) IBT BANCORP, INC. AND SUBSIDIARY - --------------------------------------------------------------------------------
Years Ended December 31, -------------------------------------------- 2000 1999 1998 ------------- ------------ ------------ SUPPLEMENTAL DISCLOSURES Cash payments for: Interest $ 15,052,496 $ 13,736,652 $ 12,629,351 Income taxes $ 2,904,000 $ 2,987,643 $ 2,716,954 NON CASH TRANSACTIONS Recorded unrealized gains (losses) on securities available for sale at December 31 $ 286,857 $ (4,816,056) $ 1,433,568 Deferred income taxes (benefit) on recorded unrealized gains (losses) on securities available for sale at December 31 $ 97,531 $ (1,637,460) $ 487,412 Loans transferred to foreclosed real estate during the year $ 320,992 $ 211,410 $ 178,548 Capital stock distributed as dividend Capital stock $ - $ - $ 59,916 Surplus $ - $ - $ 2,192,935 Three-for-one stock split in the form of a stock dividend Capital stock $ - $ - $ 2,519,833 Surplus $ - $ - $(2,519,833)
The accompanying notes are an integral part of these consolidated financial statements. -18- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IBT BANCORP, INC. AND SUBSIDIARY Years Ended December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES Nature of Operations: IBT Bancorp, Inc. (the Bancorp), is a bank holding company whose principal activity is the ownership and management of its wholly owned subsidiary, Irwin Bank and Trust Company (the Bank). The Bank is a full service state chartered commercial banking institution and provides a variety of financial services to individuals and corporate customers through its five branch offices, a loan center, five supermarket branches and main office located in Southwestern Pennsylvania. The Bank's primary deposit products are non-interest and interest-bearing checking accounts, savings accounts and certificates of deposit. Its primary lending products are single-family and multi-family residential loans, installment loans and commercial loans. Principles of Consolidation: The consolidated financial statements include the accounts of the Bancorp and the Bank. All significant intercompany accounts have been eliminated in the consolidation. Use of Estimates: The preparation of 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 and disclosure of contingent assets and liabilities at the date of the 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 relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for loan losses and foreclosed real estate, management obtains independent appraisals for significant properties. Investment Securities: All investments in debt and equity securities are to be classified into three categories. Securities which management has positive intent and ability to hold until maturity are classified as held to maturity. Securities held to maturity are stated at cost, adjusted for amortization of premium and accretion of discount computed on a level yield basis. Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities. All other securities are classified as available for sale securities. Unrealized holding gains and losses for trading securities are included in earnings. Unrealized holding gains and losses for available for sale securities are excluded from earnings and reported net of income taxes as a separate component of stockholders' equity until realized. At this time, management has no intention of establishing a trading securities classification. Interest and dividends on securities are reported as interest income. Gains and losses realized on sales of securities represent the differences between net proceeds and carrying values determined by the specific identification method. Loans and Allowance for Loan Losses: Loans are stated at unpaid principal balances, less the allowance for loan losses and net deferred loan fees. Loan origination and commitment fees, as well as certain direct origination costs, are deferred and amortized as a yield adjustment over the lives of the related loans using the interest method. Amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status. -19- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) IBT BANCORP, INC. AND SUBSIDIARY Years Ended December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The allowance for loan losses is maintained at a level which, in management's judgement, is adequate to absorb potential losses inherent in the loan portfolio. The amount of the allowance is based on management's evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans generally are determined based on collateral values or the present value of estimated cash flows. The allowance is increased by a provision for loan losses, which is charged to expense, and reduced by charge-offs, net of recoveries. Loans are placed on nonaccrual status when they are 90 days past due, unless they are adequately collateralized and in the process of collection. Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation computed on both the straight-line and accelerated methods over the estimated useful lives of the assets. Costs for maintenance and repairs are expensed currently. Cost of major additions or improvements are capitalized. Other Real Estate Owned (OREO): 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 cost at the date of foreclosure. 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, these assets are carried at the lower of their new cost basis or fair value less cost to sell. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. 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 cost to sell. Income Taxes: The Bancorp uses an asset and liability approach to financial accounting and reporting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. The Bancorp files consolidated Federal income tax returns with its subsidiary. Earnings per Share: Earnings per share are calculated on the basis of the weighted average number of shares outstanding. The weighted average shares outstanding, giving retroactive effect of the stock dividend and stock split, described in Note 17, was 3,003,334, 3,023,770 and 3,023,799 for the years ended December 31, 2000, 1999 and 1998, respectively. Cash Equivalents: For purposes of the Statements of Cash Flows, the Bancorp considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The Bancorp considers all cash and amounts due from depository institutions, interest-bearing deposits in other banks, except certificates of deposit with maturities of more than three months, and federal funds sold to be cash equivalents for purposes of the statements of cash flows. -20- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) IBT BANCORP, INC. AND SUBSIDIARY Years Ended December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 1 -- SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Reclassification of Prior Year's Statements: Certain previously reported items have been reclassified to conform to the current year's classifications. The reclassifications have no effect on total assets, total liabilities and stockholders' equity, or net income. NOTE 2 -- INVESTMENT SECURITIES Investment securities available for sale consist of the following:
December 31, 2000 --------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------- ------------- -------------- ------------- Obligations of U.S. Government Agencies $ 97,470,750 $ 340,966 $ - $ 97,811,716 Obligations of State and political sub-divisions 18,505,643 404,526 - 18,910,169 Mortgage-backed securities 44,679,971 - (548,183) 44,131,788 Other securities 817,265 5,562 (2,200) 820,627 Equity securities 4,149,400 86,186 - 4,235,586 ------------- ------------- ------------- ------------- $ 165,623,029 $ 837,240 $ (550,383) $ 165,909,886 ============= ============= ============= =============
December 31, 1999 --------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------- ------------- -------------- ------------- Obligations of U.S. Government Agencies $ 93,081,432 $ - $ (2,337,153) $ 90,744,279 Obligations of State and political sub-divisions 10,855,620 3,791 (323,614) 10,535,797 Mortgage-backed securities 49,245,605 - (2,240,851) 47,004,754 Other securities 577,895 5,713 - 583,608 Equity securities 154,410 76,058 - 230,468 ------------- ------------- ------------- ------------- $ 153,914,962 $ 85,562 $ (4,901,618) $ 149,098,906 ============= ============= ============= =============
-21- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) IBT BANCORP, INC. AND SUBSIDIARY Years Ended December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 2 -- INVESTMENT SECURITIES (CONTINUED) Gross realized gains and losses on calls and sales of available-for-sale securities were:
Years Ended December 31, ------------------------------ 2000 1999 1998 -------- -------- -------- Gross realized gains: U.S. Treasury securities $ - $ 21,143 $ - Obligations of U.S. Government Agencies - 9,790 58,191 Obligations of state and political sub-divisions - - 3,121 Mortgage-backed securities - 22,261 - -------- -------- -------- $ - $ 53,194 $ 61,312 ======== ======== ======== Gross realized losses: Obligations of U.S. Government Agencies $106,974 $ 29,687 $ - Mortgage-backed securities - - 20,901 -------- -------- -------- $106,974 $ 29,687 $ 20,901 ======== ======== ========
The amortized cost and estimated market value of the investment securities available for sale at December 31, 2000, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers have the right to call or prepay obligations with or without call or prepayment penalties. The amortized cost and estimated market value of the investment securities available for sale at December 31, 2000 are as follows: Amortized Market Cost Value ------------ ------------ Due in one year or less $ 7,827,333 $ 7,816,785 Due after one year through five years 43,256,405 43,492,943 Due after five years through ten years 39,670,999 40,015,242 Due after ten years, includes equity securities 74,868,292 74,584,916 ------------ ------------ $165,623,029 $165,909,886 ============ ============ As a member of the Federal Home Loan Bank of Pittsburgh (FHLB), the Bank is required to maintain a minimum amount of FHLB stock. The minimum amount is calculated based on level of assets, residential real estate loans and outstanding FHLB advances. The Bank held $1,964,300 of FHLB stock at December 31, 2000 and 1999. -22- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) IBT BANCORP, INC. AND SUBSIDIARY Years Ended December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 3 -- LOANS Major classifications of loans are as follows: December 31, --------------------------- 2000 1999 ------------ ------------ Mortgage $152,752,889 $130,347,599 Home equity credit 10,067,310 8,885,737 Installment 65,326,867 61,983,558 Commercial 52,675,603 47,293,848 PHEAA 6,631,715 6,166,194 Municipal 5,945,048 6,346,773 Credit cards -- 1,780,360 Other 611,416 210,097 ------------ ------------ 294,010,848 263,014,166 Less: Allowance for loan losses 1,919,327 2,365,874 Deferred loan fees 177,461 146,022 ------------ ------------ $291,914,060 $260,502,270 ============ ============ In 2000, the Bank sold its credit card portfolio for approximately $1,760,000. The realized gain on the sale was approximately $115,000 which is included in other income on the statement of income. The total recorded investment in impaired loans amounted to $0 at December 31, 2000 and approximately $150,000 at December 31, 1999. The allowance for loan losses related to impaired loans amounted to $0 and approximately $22,500 at December 31, 2000 and 1999, respectively. Changes in the allowance for loan losses were as follows: Years Ended December 31, ----------------------------------------- 2000 1999 1998 ----------- ----------- ----------- Balance, beginning of year $ 2,365,874 $ 2,228,214 $ 2,340,283 Provision charged to operations 300,000 300,000 300,000 Loans charged off (767,486) (175,436) (526,117) Recoveries 20,939 13,096 114,048 ----------- ----------- ----------- Balance, end of year $ 1,919,327 $ 2,365,874 $ 2,228,214 =========== =========== =========== -23- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) IBT BANCORP, INC. AND SUBSIDIARY Years Ended December 31, 2000, 1999 and 1998 NOTE 4 -- PREMISES AND EQUIPMENT Premises and equipment which are stated at cost are as follows: December 31, ------------------------- 2000 1999 ----------- ----------- Land $ 450,466 $ 450,466 Buildings and improvements 5,053,222 4,814,040 Furniture and equipment 4,780,789 4,320,561 ----------- ----------- 10,284,477 9,585,067 Less: Accumulated depreciation 5,384,700 4,856,365 ----------- ----------- $ 4,899,777 $ 4,728,702 =========== =========== Depreciation expense was $528,335 in 2000, $499,068 in 1999 and $482,000 in 1998. Eight of the Bank's branch office buildings and/or land are leased by the Bank. These leases have initial terms of 1 to 20 years, and all contain renewal options for additional years. The following is a summary of the future minimum lease payments under these operating leases: For the year ended December 31, 2001 $ 167,257 2002 145,587 2003 120,625 2004 107,050 2005 and thereafter 621,911 ------------- $ 1,162,430 ============= Rental expense under these operating leases was $149,043, $130,780 and $100,700 for the years ended December 31, 2000, 1999 and 1998, respectively. -24- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) IBT BANCORP, INC. AND SUBSIDIARY Years Ended December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 5 -- DEPOSITS Time deposits maturing in years ending December 31, as of December 31, 2000 are summarized as follows: 2001 $140,949,056 2002 39,282,196 2003 14,815,296 2004 3,824,302 2005 and thereafter 6,465,505 ------------- $205,336,355 ============= The Bank held related party deposits of approximately $3,272,000 and $4,541,000 at December 31, 2000 and 1999, respectively. The Bank held time deposits that exceeded $100,000 of $36,942,793 and $34,132,826 at December 31, 2000 and 1999, respectively. NOTE 6 -- REPURCHASE AGREEMENT During 1999, the Bank began offering its corporate customers an investment product fashioned in the form of a repurchase agreement. Under the terms of the agreement, deposits in designated demand accounts of the customer are put into an investment vehicle which is used daily to purchase an interest in designated U.S. Government or Agencies' securities owned by the Bank. The Bank in turn agrees to repurchase these investments on a daily basis and pay the customer the daily interest earned on them. The amount of repurchase agreements was $9,022,190 and $6,456,597 at December 31, 2000 and 1999, respectively. NOTE 7 -- PLEDGED ASSETS At December 31, 2000 and 1999, U.S. Government obligations carried at approximately $37,000,000 and $32,250,000, respectively, were pledged to qualify for fiduciary powers, to secure public monies and for other purposes required or permitted by law. At December 31, 2000 and 1999, the carrying amount of securities pledged to secure repurchase agreements was approximately $14,000,000 and $11,000,000, respectively. -25- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) IBT BANCORP, INC. AND SUBSIDIARY Years Ended December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 8 -- INCOME TAXES The provision for income taxes consists of: Years Ended December 31, ---------------------------------------- 2000 1999 1998 ----------- ----------- ----------- Currently payable $ 2,815,429 $ 3,012,368 $ 2,618,602 Deferred tax (benefit) 144,010 (29,977) 117,974 ----------- ----------- ----------- Total $ 2,959,439 $ 2,982,391 $ 2,736,576 =========== =========== =========== The significant components of temporary differences for 2000, 1999 and 1998 are as follows: Years Ended December 31, ----------------------------------- 2000 1999 1998 --------- --------- --------- Provision for loan losses $ 151,347 $ (46,906) $ 38,201 Depreciation (12,665) (5,387) 10,559 Valuation allowance 550 553 550 Pension 20,168 38,301 67,732 Deferred loan fees (10,689) (722) 10,222 Other (4,701) (15,816) (9,290) --------- --------- --------- Total $ 144,010 $ (29,977) $ 117,974 ========= ========= ========= A reconciliation of the federal statutory tax rate to the effective tax rate applicable to income before income taxes is as follows: Years Ended December 31, ------------------------------- % of Pretax Income ------------------------------- 2000 1999 1998 ------ ------ ------ Provision at statutory rate 34.0 % 34.0 % 34.0 % Effect of tax free income (3.1) (2.0) (2.0) Other (0.3) - .1 ------ ------ ------ Effective tax rate 30.6 % 32.0 % 32.1 % ====== ====== ====== -26- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) IBT BANCORP, INC. AND SUBSIDIARY Years Ended December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 8 -- INCOME TAXES (CONTINUED) The deferred tax assets and deferred tax liabilities recorded on the balance sheet as of December 31, 2000 and 1999 are as follows: 2000 1999 ------------------------ ------------------------ Deferred Tax Deferred Tax ------------------------ ------------------------ Assets Liabilities Assets Liabilities ---------- ----------- ---------- ----------- Provision for loan losses $ 448,858 $ - $ 600,205 $ - Depreciation - 156,528 - 169,192 Pension expense - 56,506 - 36,339 Other 183,056 - 168,216 - SFAS 115 - 97,531 1,637,460 - ---------- ---------- ---------- ---------- $ 631,914 $ 310,565 $2,405,881 $ 205,531 ========== ========== ========== ========== NOTE 9 -- LONG-TERM DEBT At December 31, 2000 and 1999, the Bank had the following advances from the Federal Home Loan Bank (FHLB). 2000 1999 Interest Rate Maturity Date - ----------------- ------------- ------------------------- ----------------- $ 2,000,000 $ 2,000,000 5.88% Fixed March 13, 2001 10,000,000 10,000,000 5.86% Fixed w/Strike Rate July 22, 2004 5,000,000 5,000,000 5.63% Fixed to Float July 21, 2008 5,000,000 5,000,000 4.86% Fixed to Float October 23, 2008 2,000,000 - 7.09% Fixed August 28, 2001 2,000,000 - 7.01% Fixed August 8, 2002 2,000,000 - 6.83% Fixed March 8, 2001 - ----------------- ------------- $28,000,000 $ 22,000,000 ================= ============= Interest only is payable until maturity on all long-term debt. Collateral for all debt includes all qualifying mortgages. The Bank had maximum borrowing capacity with FHLB of approximately $216,665,000 and $136,547,000 at December 31, 2000 and 1999, respectively. NOTE 10 -- EMPLOYEE BENEFIT PLANS The Bank maintained one non-contributory defined benefit pension plan for its employees prior to 1995 (Plan #1). In 1995, various plan assumptions were changed which resulted in a reduction in benefits for older and long-standing employees. To compensate for this, a supplemental non-qualified plan was installed for those employees so affected (Plan #2). The Bank's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes for Plan #1. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Assets for the plans are primarily invested in U.S. Government obligations, corporate obligations and equity securities whose valuations are subject to fluctuations of the securities' market. -27- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) IBT BANCORP, INC. AND SUBSIDIARY Years Ended December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 10 -- EMPLOYEE BENEFIT PLANS (CONTINUED) The following is a summary of the plans as of December 31, 2000 and 1999:
2000 1999 1998 ----------- ----------- ----------- Change in Projected Benefit Obligation: Benefit obligation at beginning of year $ 1,765,691 $ 2,279,047 $ 1,986,373 Service cost 150,403 180,192 160,189 Interest cost 122,204 158,453 137,966 Actuarial loss due to settlement - 128,760 - Benefits paid (75,139) (19,100) (18,667) Plan settlement - (840,928) - Other - net (122,751) (120,733) 13,186 ----------- ----------- ----------- Benefit obligation at end of year $ 1,840,408 $ 1,765,691 $ 2,279,047 =========== =========== =========== Change in Fair Value of Plan Assets: Plan assets at estimated fair value at beginning of year $ 2,016,241 $ 2,510,141 $ 2,207,486 Actual return on plan assets 105,065 177,449 177,907 Plan settlement - (840,928) - Benefits paid (75,139) (19,100) (18,667) Employer contributions 168,975 188,679 143,415 ----------- ----------- ----------- Fair value of plan assets at end of year $ 2,215,142 $ 2,016,241 $ 2,510,141 =========== =========== =========== Funded status $ 374,734 $ 250,550 $ 231,094 Unrecognized net loss from actuarial experience 27,502 149,953 134,196 Unrecognized prior service cost (238,486) (256,748) (275,010) Unamortized net asset existing at date of adoption of SFAS No. 87 (39,369) (73,879) (80,912) Settlement - (17,717) - ----------- ----------- ----------- Prepaid pension cost $ 124,381 $ 52,159 $ 9,368 =========== =========== ===========
Net pension expense included the following components:
Years Ended December 31, ----------------------------------- 2000 1999 1998 --------- --------- --------- Service cost - benefits earned during the period $ 150,403 $ 180,192 $ 160,189 Interest cost on projected benefit obligation 122,204 158,453 137,966 Actual return on plan assets (105,065) (177,449) (177,907) Net amortization and deferral (70,789) (33,025) (6,042) --------- --------- --------- Net periodic pension cost $ 96,753 $ 128,171 $ 114,206 ========= ========= =========
The projected benefit obligation for Plan #1 was determined using an assumed discount rate of 7.75% for 2000 and 7.0% for 1999 and 1998 and an expected rate of increase in compensation using a graded scale ranging from 3.5% to 5.5%. The projected benefit obligation for Plan #2 was determined using an assumed discount rate of 7.0% and an expected rate of increase in compensation of 3.5% for 2000, 1999 and 1998. For both plans, the assumed rate of return on the plans' investment earnings was 7.0 % for 2000, 1999 and 1998. -28- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) IBT BANCORP, INC. AND SUBSIDIARY Years Ended December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 10 -- EMPLOYEE BENEFIT PLANS (CONTINUED) The Bank also maintains non-qualified deferred compensation plans for certain directors, which are generally funded by life insurance, the premiums of which have been paid for by the Bank. The present value of these benefits to be paid under the programs is being accrued over the estimated remaining service period of the participants. The liability for these future obligations was $453,806 and $447,836 at December 31, 2000 and 1999, respectively. In addition, the Bank maintains a qualified 401(k) - deferred compensation plan for eligible employees. The plan is designed to provide a predetermined matching contribution by the Bank based on compensation deferrals by participants in the plan. The Bank contributions, including administrative fees, for 2000, 1999 and 1998 amounted to $49,526, $42,228 and $42,753, respectively. NOTE 11 -- COMMITMENTS AND CONTINGENCIES In the normal course of business, there are various outstanding commitments and certain contingent liabilities which are not reflected in the accompanying financial statements. These commitments and contingent liabilities represent financial instruments with off-balance-sheet risk. The contract or notional amounts of those instruments were comprised of commitments to extend credit approximating $58,436,000 and $51,851,000, as of December 31, 2000 and 1999, respectively, and approximate fair value. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The same credit policies are used in making commitments and conditional obligations as for on-balance-sheet instruments. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management's credit evaluation of the counterparty. The terms are typically for a one year period, with an annual renewal option subject to prior approval by management. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. These commitments are comprised primarily of available commercial and personal lines of credit. The exposure to loss under these commitments is limited by subjecting them to credit approval and monitoring procedures. Substantially all of the commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of the loan funding. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for loan losses. Since many of the commitments are expected to expire without being drawn upon, the total contractual amounts do not necessarily represent future funding requirements. The Bancorp and Bank are involved in various legal actions from normal business activities. Management believes that the liability, if any, arising from such actions will not have a material adverse effect on the financial position of the Bancorp and Bank. -29- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) IBT BANCORP, INC. AND SUBSIDIARY Years Ended December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 12 -- RELATED-PARTY TRANSACTIONS At December 31, 2000 and 1999, certain officers and directors of the Bancorp and the Bank, and companies in which they have beneficial ownership, were indebted to the Bank in the aggregate amount of approximately $5,185,000 and $5,651,000, respectively. During 2000, new loans to such related parties were approximately $1,111,000 and repayments approximated $1,577,000. NOTE 13 -- CONCENTRATION OF CREDIT The Bank primarily grants loans to customers in Western Pennsylvania, and maintains a diversified loan portfolio and the ability of its debtors to honor their contracts is not substantially dependent on any particular economic business sector. A substantial portion of the Bank's investments in municipal securities are obligations of state or political subdivisions located within Pennsylvania. As a whole, the Bank's loan and investment portfolios could be affected by the general economic conditions of Pennsylvania. In addition, at December 31, 2000 and 1999, a significant portion of the Bank's "due from banks" and "federal funds sold" is maintained with two large financial institutions located in Southwestern Pennsylvania. The Bank maintains a cash balance and federal funds sold at financial institutions that exceed the $100,000 amount that is insured by the FDIC. Amounts in excess of insured limits, per the institutions' records, were approximately $12,143,000 and $3,627,000 at December 31, 2000 and 199 NOTE 14 -- DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. Cash and cash equivalents: The carrying amount is a reasonable estimate of fair value. Certificates of deposit: The carrying amounts of these short term investments approximate their fair value. Investment securities: The fair value of securities is equal to the available quoted market price. If no quoted market price is available, fair value is estimated using the quoted market price for similar securities. Federal Home Loan Bank stock: The carrying value of the FHLB stock is a reasonable estimate of fair value due to restrictions on the securities. Loans receivable: For certain homogeneous categories of loans, fair value is estimated using the quoted market prices for securities backed by similar loans adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers for the same remaining maturities. -30- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) IBT BANCORP, INC. AND SUBSIDIARY Years Ended December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 14 -- DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) Deposit liabilities: The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities. Short term borrowings: The carrying amounts of federal funds purchased and borrowings under repurchase agreements are short term borrowings and approximate their fair values. Long term debt: The fair value of long term debt (FHLB advances) was determined using a discounted cash flow analysis based on current FHLB advance rates for advances with similar maturities. The estimated fair value of the Bancorp's financial instruments as of December 31, 2000 are as follows: Carrying Fair Amount Value ------------- ------------- Financial Assets: Cash and cash equivalents $ 21,746,395 $ 21,746,395 Certificates of deposit $ 2,700,000 $ 2,700,000 Investment securities $ 165,909,886 $ 165,909,886 Federal Home Loan Bank Stock $ 1,964,300 $ 1,964,300 Loans receivable $ 291,914,060 $ 291,244,826 Financial liabilities: Deposits $ 409,638,462 $ 410,891,763 Short term borrowings $ 9,022,190 $ 9,022,190 Long term debt $ 28,000,000 $ 28,967,532 The market values of investments, which are based upon quoted market prices, are contained in Note 2. NOTE 15 -- REGULATORY MATTERS The Bank is subject to legal limitations on the amount of dividends that can be paid to the Bancorp. The Pennsylvania Banking Code restricts the payment of dividends, generally to the extent of its retained earnings. -31- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) IBT BANCORP, INC. AND SUBSIDIARY Years Ended December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 15 -- REGULATORY MATTERS (CONTINUED) The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios, as set forth below, of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2000 and 1999, that the Bank meets all capital adequacy requirements to which it is subjected. The Bank's actual capital ratios as of December 31, 2000 and 1999, the minimum ratios required for capital adequacy purposes, and the ratios required to be considered well capitalized under the Federal Deposit Insurance Corporation Improvement Act of 1991 provisions are as follows:
December 31, Minimum Well ------------------- Capital Capitalized 2000 1999 Requirements Requirements --------- ------- --------------- --------------- Risk-based capital ratio 16.3% 16.5% 8.0% 10.0% or higher Leverage capital ratio 9.0% 9.0% 3.0% to 4.0% 5.0% or higher Tier 1 risk-based capital ratio 15.6% 15.6% 4.0% 6.0% or higher
Included in cash and due from banks are required federal reserves of $3,126,000 and $5,033,000 at December 31, 2000 and 1999, respectively, for facilitating the implementation of monetary policy by the Federal Reserve System. The required reserves are computed by applying prescribed ratios to the classes of average deposit balances. These reserves are held in the form of due from banks. NOTE 16 -- RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments Hedging Activities." This Statement establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. In addition, certain provisions of this statement will permit, at the date of initial adoption of this Statement, the transfer of any held to maturity security into either the available for sale or trading category and the transfer of any available for sale security into the trading category. Transfers from the held to maturity portfolio at the date of initial adoption will not call into question the entity's intent to hold other debt securities to maturity in the future. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000, as amended by FASB No. 137 and 138, is not expected to have any impact on the Bank. the Bank does not intend to adopt SFAS No. 133 earlier than required. -32- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) IBT BANCORP, INC. AND SUBSIDIARY Years Ended December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 16 -- RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED) In November 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement replaces SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of Statements 125's provisions without reconsideration. The Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. SFAS No. 140 is not expected to have any impact on the Bank. NOTE 17 -- CAPITAL STOCK In January 1998, the Bancorp declared a 5% stock dividend to stockholders of record at January 15, 1998, payable February 2, 1998. Fractional shares were paid for in cash, totaling $3,149. The Bancorp issued 47,933 shares of capital stock in conjunction with this dividend. In addition, on December 28, 1998, the Bancorp declared a three-for-one stock split on the Bancorp's capital stock, which was effected in the form of a 200 percent stock dividend. Two additional shares were issued for each share of capital stock held by shareholders of record as of the close of business on January 6, 1999. New share were distributed on January 29, 1999. Par value will remain unchanged at $1.25. The effect of the stock split has been retroactively reflected as of December 31, 1998 in the consolidated statement of changes in stockholders' equity. All references to the number of shares and per share amounts elsewhere in the consolidated financial statements and related footnotes have been restated as appropriate to reflect the effect of the split for all periods presented. NOTE 18 -- TREASURY STOCK In 2000 and 1999, the Bancorp repurchased 19,251 and 2,625 shares of its stock for $601,864 and $87,612, respectively, and is being held as treasury stock. NOTE 19 -- STOCK OPTION PLAN In 2000, the stockholders approved the 2000 Stock Option Plan. Under the terms of the plan, officers, directors, key employees and other persons may be granted options to purchase the company's common stock at no less than 100% of the fair market value of the common stock on the date the option is granted. The Option Plan provides for a term of ten years, after which no awards may be made. Options constitute both Incentive Stock Options or Non-Incentive Stock Options. Options granted to non-employee directors are immediately exercisable and options granted to employees generally vest over three years. Options granted to both non-employee directors and employees have a maximum term of 10 years. At December 31, 2000 a total of 300,000 shares were reserved for future issuance under the plan. In May 2000, 61,000 stock options were granted under this plan at an exercise price of $24.50 per share. -33- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) IBT BANCORP, INC. AND SUBSIDIARY Years Ended December 31, 2000, 1999 and 1998 NOTE 19 -- STOCK OPTION PLAN (CONTINUED) A summary of the status of the Bank's stock option plan as of December 31, 2000, and changes for the year then ended is presented below: Weighted Exercise Average Shares Price ---------------- ---------- Outstanding at the beginning of the year - $ - Granted 61,000 24.50 Expired/forfeited - - Exercised - - ---------------- Outstanding at December 31, 2000 61,000 $ 24.50 ================ Exercisable at December 31, 2000 18,000 ================ The options outstanding at December 31, 2000 had a weighted-average contractual maturity of 9.375 years and an exercise price of $24.50. The per share weighted-average fair value of stock options granted with an exercise price equal to market for the year ended December 31, 2000 was $3.21, using the Black-Scholes option pricing model with the following weighted-average assumptions for 2000: expected life of 7 years, expected annual dividend rate of 4.57%, risk-free interest rate of 5.095%, and an expected volatility of 27%. The Bank accounts for stock options in accordance with Accounting Principles Board Opinion No. 25. Had the Bank determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Bank's net income would have been reduced to the proforma amounts indicated below: Year ended December 31, 2000 ----------------- Net income: As reported $ 6,705,261 Pro Forma 6,667,136 Net income per share: Basic and Diluted as reported 2.23 Basic and Diluted Pro Forma 2.20 -34- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) IBT BANCORP, INC. AND SUBSIDIARY Years Ended December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 20 -- CONDENSED CONSOLIDATED SELECTED QUARTERLY FINANCIAL DATA (Unaudited) QUARTERS ENDED 2000 --------------------------------------------------- March 31 June 30 September 30 December 31 ---------- ---------- ------------- ----------- Interest income $7,908,984 $8,265,275 $8,628,150 $8,984,705 Interest expense 3,638,514 3,865,929 4,318,206 4,764,919 ---------- ---------- ---------- ---------- Net interest income 4,270,470 4,399,346 4,309,944 4,219,786 Provision for loan losses 75,000 75,000 75,000 75,000 Non-interest income 669,086 742,258 764,567 770,530 Non-interest expense 2,431,387 2,605,445 2,529,051 2,615,404 ---------- ---------- ---------- ---------- Income before income taxes 2,433,169 2,461,159 2,470,460 2,299,912 Income tax expense 781,192 804,911 740,248 633,088 ---------- ---------- ---------- ---------- Net income $1,651,977 $1,656,248 $1,730,212 $1,666,824 ========== ========== ========== ========== Net income per Share of Capital Stock $ 0.55 $ 0.55 $ 0.58 $ 0.55 ========== ========== ========== ========== Weighted average shares outstanding: Basic and Diluted 3,007,597 3,001,923 3,001,923 3,001,923 ========== ========== ========== ========== QUARTERS ENDED 1999 -------------------------------------------------- March 31 June 30 September 30 December 31 ---------- ---------- ------------ ----------- Interest income $7,080,100 $7,150,406 $7,614,167 $7,885,955 Interest expense 3,228,619 3,189,554 3,547,337 3,678,078 ---------- ---------- ---------- ---------- Net interest income 3,851,481 3,960,852 4,066,830 4,207,877 Provision for loan losses 45,000 45,000 105,000 105,000 Non-interest income 601,158 680,365 730,928 751,615 Non-interest expense 2,099,755 2,257,533 2,329,841 2,545,832 ---------- ---------- ---------- ---------- Income before income taxes 2,307,884 2,338,684 2,362,917 2,308,660 Income tax expense 741,114 747,492 760,121 733,664 ---------- ---------- ---------- ---------- Net income $1,566,770 $1,591,192 $1,602,796 $1,574,996 ========== ========== ========== ========== Net income per Share of Capital Stock $ 0.52 $ 0.52 $ 0.53 $ 0.53 ========== ========== ========== ========== Weighted average shares outstanding: Basic 3,023,799 3,023,799 3,023,799 3,023,684 ========== ========== ========== ========== -35- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) IBT BANCORP, INC. AND SUBSIDIARY Years Ended December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 21 -- PARENT COMPANY FINANCIAL INFORMATION The condensed financial information for IBT Bancorp, Inc. as of December 31, 2000 and 1999 and for the years ended December 31, 2000, 1999 and 1998 is as follows: BALANCE SHEETS December 31 ------------------------- 2000 1999 ----------- ----------- ASSETS Cash in bank $ 3,482 $ 770 Investment in subsidiary 43,894,268 36,975,372 Securities available for sale 457,851 733,363 Other assets 279,780 221,634 ----------- ----------- Total Assets $44,635,381 $37,931,139 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities $ 20,800 $ 25,859 Stockholders' Equity 44,614,581 37,905,280 ----------- ----------- Total Liabilities and Stockholders' Equity $44,635,381 $37,931,139 =========== =========== STATEMENTS OF INCOME
Years Ended December 31, ------------------------------------ 2000 1999 1998 ---------- ---------- ---------- Income Dividends from subsidiary $3,325,000 $2,500,000 $2,100,000 Other dividends 14,141 33,586 32,157 Expenses Professional fees 76,676 84,781 20,979 Miscellaneous 98,356 16,786 14,729 ---------- ---------- ---------- Income Before Income Taxes and Equity in Undistributed Earnings of Subsidiary 3,164,109 2,432,019 2,096,449 Equity in Undistributed Earnings of Subsidiary 3,541,152 3,903,735 3,704,481 ---------- ---------- ---------- Net Income $6,705,261 $6,335,754 $5,800,930 ========== ========== ==========
-36- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) IBT BANCORP, INC. AND SUBSIDIARY Years Ended December 31, 2000, 1999 and 1998 NOTE 21 -- PARENT COMPANY FINANCIAL INFORMATION (CONTINUED) STATEMENTS OF CASH FLOWS
Years Ended December 31, ----------------------------------------- 2000 1999 1998 ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 6,705,261 $ 6,335,754 $ 5,800,930 Adjustments to reconcile net income to net cash provided by operating activities: Decrease in cash due to changes in assets and liabilities: Equity in undistributed earnings of subsidiary (3,541,152) (3,903,735) (3,704,481) Other assets (58,146) - - ----------- ----------- ----------- Net Cash From Operating Activities 3,105,963 2,432,019 2,096,449 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of securities available for sale 260,631 74,773 - Purchase of securities available for sale - - (158,861) ----------- ----------- ----------- Net Cash From (Used By) Investing Activities 260,631 74,773 (158,861) CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid (2,762,018) (2,419,039) (1,938,380) Purchase of Treasury Stock (601,864) (87,612) - ----------- ----------- ----------- Net Cash Used by Financing Activities (3,363,882) (2,506,651) (1,938,380) ----------- ----------- ----------- Net Change in Cash and Cash Equivalents 2,712 141 (792) Cash and Cash Equivalents at Beginning of Year 770 629 1,421 ----------- ----------- ----------- Cash and Cash Equivalents at End of Year $ 3,482 $ 770 $ 629 =========== =========== ===========
-37- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) IBT BANCORP, INC. AND SUBSIDIARY Years Ended December 31, 2000, 1999 and 1998 - -------------------------------------------------------------------------------- NOTE 22 -- JOINT VENTURES In 2000, the Bancorp formed a new subsidiary, IBT Financial Services, LLC. The newly formed subsidiary commenced operations in June 2000 and offers a full range of investment products and insurance services to customers and the general public. The Bancorp owns fifty percent of the newly formed company and is accounting for its investment using the equity method. As of December 31, 2000, the corporate joint venture is reflected in the other assets section of the balance sheet at $49,270 which represents the Bancorp's cost in the amount of $125,000 less equity in the undistributed net losses during the year of $75,730. Also in 2000, the Bancorp formed a new partnership, T.A. of Irwin, L.P. This newly formed partnership commenced operations in October 2000 and provides title insurance to the general public. The Bancorp's capital contribution was $13,231 representing an 85% limited partnership interest. The Bancorp is using the equity method to account for its investment in the partnership. As of December 31, 2000, the partnership is reflected in the other assets section of the balance sheet at $8,876 which represents the Bancorp's initial cost less equity in the undistributed net losses during the year of $4,355. -38- IBT BANCORP, INC. Corporate Profile IBT Bancorp, Inc. (the "Company"), a Pennsylvania corporation, is the bank holding company for Irwin Bank & Trust Company ("Irwin Bank"). Irwin Bank is the principal subsidiary of the Company. Irwin Bank & Trust Company was incorporated in 1922 under the laws of Pennsylvania as a commercial bank. The Bank is headquartered in Irwin, Pennsylvania and conducts business through 6 full service branches, 5 supermarket branches, a loan office and a trust office, in the Pennsylvania counties of Westmoreland and Allegheny. Irwin Bank is a diversified financial services institution providing a broad range of deposits, commercial and retail banking services, as well as trust services to consumers and businesses. Deposits in Irwin Bank are insured by the Federal Deposit Insurance Corporation to applicable limits. Stock Market Information The Company's common stock is listed on the OTC Bulletin Board under the symbol "IBTB". As of March 02, 2001, IBT Bancorp, Inc. had approximately 648 shareholders of record and 3,001,923 shares of common stock issued and outstanding. The number of shareholders does not reflect persons or entities who hold their stock in nominee or "street" name through various brokerage firms. The following table sets forth high and low bid prices per share for the common stock for the calendar quarters indicated, based upon information obtained from the OTC Bulletin Board. All such bid prices reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. On January 29, 1999, the Company paid a 5% stock dividend and a 200% stock dividend (in the form of a three for one stock split), respectively. Cash dividend and market prices set forth in the table below have also been adjusted for the stock dividends declared and paid by the Company. Price Range Cash Dividends High ($) Low ($) Declared Per Share ($) -------- ------- ---------------------- 1999 ---- First Quarter 40.00 28.33 .20 Second Quarter 34.75 32.00 .20 Third Quarter 34.00 31.75 .20 Fourth Quarter 33.38 29.00 .20 2000 ---- First Quarter 33.50 24.00 .23 Second Quarter 27.00 21.50 .23 Third Quarter 22.25 20.00 .23 Fourth Quarter 22.25 20.13 .23 The ability of the Company to pay dividends is dependent upon the ability of Irwin Bank to pay dividends to the Company. Because Irwin Bank is a depository institution insured by the FDIC it may not pay dividends or distribute capital assets if it is in default on any assessment due the FDIC. Additionally, Irwin Bank is also subject to certain state banking regulations. Under Federal Reserve policy, the Company is required to maintain adequate regulatory capital and is expected to act as a source of financial strength to Irwin Bank and to commit resources to support Irwin Bank in circum- -39- stances where it might not do so absent such a policy. This policy could have the effect of reducing the amount of dividends declarable by the Company. 40 EX-23 3 0003.txt EXHIBIT 23 EXHIBIT 23 [LOGO] Certified Public Accountants & Business Advisors EDWARDS ------------------------------------------------------------ SAUER & 500 Warner Centre, 332 Fifth Avenue, Pittsburgh, PA 15222 OWENS Phone: 412-281-9211 Fax: 412-281-2407 A Professional Corporation www. esocpa.com INDEPENDENT ACCOUNTANTS' CONSENT The Board of Directors and Stockholders IBT Bancorp, Inc. 309 Main Street Irwin, PA 15642 We consent to the incorporation by reference in the registration statement on Form S-8 pertaining to IBT Bancorp, Inc.'s 2000 Stock Option Plan filed June 30, 2000, of our report dated February 1, 2001, relating to the consolidated balance sheets of IBT Bancorp, Inc. as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000, which report appears in the December 31, 2000, annual report on Form 10-K of IBT Bancorp, Inc. /s/ Edwards Sauer & Owens - -------------------------------- Edwards Sauer & Owens March 15, 2001 Pittsburgh, Pennsylvania -----END PRIVACY-ENHANCED MESSAGE-----