10-K 1 f10k_123104-0262.txt FORM 10-K 12-31-04 IBT BANCORP, INC. ================================================================================ UNITED STATES 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, 2004 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to __________________ Commission File Number: 1-31655 ------- 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: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- COMMON STOCK, $1.25 PAR VALUE AMERICAN STOCK EXCHANGE ----------------------------- ----------------------- STOCK PURCHASE RIGHTS AMERICAN STOCK EXCHANGE --------------------- ----------------------- Securities registered pursuant to Section 12(g) of the Act: NONE ---- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] YES [ ] NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). [X] YES [ ] NO Based on the closing sales price of $45.50 per share of the registrant's common stock on June 30, 2004, as reported on the American Stock Exchange, the aggregate market value of voting and non-voting stock held by non- affiliates of the registrant was approximately $124.1 million. Solely for purposes of this calculation, directors and executive officers are deemed affiliates. As of March 1, 2005, there were 2,955,455 shares of the Registrant's common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of 2004 Annual Report to Stockholders (Parts II and IV) 2. Portions of Proxy Statement for the 2005 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, 2004, the Bank operated through its main office, seven 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 located at "www.myirwinbank.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, which are part of the Pittsburgh Metropolitan Statistical Area ("Pittsburgh MSA") and is one of many financial institutions serving this market area. Based on data compiled by the FDIC as of June 30, 2004 (the latest date for which such data is available) the Bank was ranked sixth of 20 FDIC-insured institutions in Westmoreland County with a 6.61% deposit market share and 19th out of 39 institutions in Allegheny County with a 0.39% deposit market share. The Bank was ranked 12th out of 64 institutions serving the Pittsburgh MSA with a 1.0% market share. Such data does not reflect deposits held by credit unions with which the Bank also competes. 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, -------------------------------------------------------------------------- 2004 2003 2002 ------------------- -------------------- ------------------- $ % $ % $ % ------- ------ ------- ------ ------- ------ (DOLLARS IN THOUSANDS) Mortgage....................... $252,114 57.37% $244,923 58.33% $210,244 57.87% Installment.................... 84,673 19.27 78,327 18.65 59,321 16.33 Commercial..................... 61,140 13.91 59,591 14.19 58,634 16.14 Home equity lines of credit.... 23,201 5.28 21,963 5.23 15,832 4.36 PHEAA (1)...................... 7,355 1.67 7,834 1.87 6,900 1.90 Municipal...................... 10,050 2.29 6,268 1.49 11,190 3.08 Credit cards................... 45 0.01 38 0.01 32 0.01 Other.......................... 855 0.20 965 0.23 1,148 0.31 ------- ------ ------- ------ ------- ------ Total loans...................... 439,433 100.00% 419,909 100.00% 363,301 100.00% ====== ====== ====== Less: Unearned discount.............. -- -- -- Deferred loan origination fees and costs............... 291 338 557 Allowance for loan losses...... 2,594 3,285 2,873 ------- ------- ------- Total loans, net................. $436,548 $416,286 $359,871 ======= ======= ======= AT DECEMBER 31, ------------------------------------------ 2001 2000 -------------------- ------------------- $ % $ % ------- ------ ------- ------ (DOLLARS IN THOUSANDS) Mortgage....................... $173,214 54.55% $152,753 51.95 Installment.................... 64,053 20.17 65,327 22.22 Commercial..................... 55,185 17.38 52,676 17.92 Home equity lines of credit.... 11,001 3.47 10,067 3.42 PHEAA (1)...................... 6,950 2.19 6,632 2.26 Municipal...................... 5,369 1.69 5,945 2.02 Credit cards................... 32 0.01 -- -- Other.......................... 1,715 0.54 611 0.21 ------- ------ ------- ------ Total loans...................... 317,519 100.00% 294,011 100.00% ====== ====== Less: Unearned discount.............. -- -- Deferred loan origination fees and costs............... 273 178 Allowance for loan losses...... 2,114 1,919 ------- ------- Total loans, net................. $315,132 $291,914 ======= ======= _________________________ (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, 2004. 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 -------- -------- ----------- ---------- ------ --------- (IN THOUSANDS) 1 year or less............ $11,734 $23,201 $11,342 $14,098 $ -- $10,050 After 1 year: 1 to 5 years............ 58,552 -- 37,480 17,844 7,355 -- After 5 years........... 181,828 -- 35,851 29,198 -- -- -------- ------- ------- ------- ------ ------- Total due after one year.. 240,380 -- 73,331 47,042 7,355 -- -------- ------- ------- ------- ------ ------- Total amount due.......... $252,114 $23,201 $84,673 $61,140 $7,355 $10,050 ======== ======= ======= ======= ====== ======= CREDIT CARDS (2) OTHER TOTAL ------- ----- ----- (IN THOUSANDS) 1 year or less............ $45 $855 $71,325 After 1 year: 1 to 5 years............ -- -- 121,231 After 5 years........... -- -- 246,877 --- ---- -------- Total due after one year.. -- -- 368,108 --- ---- -------- Total amount due.......... $45 $855 $439,433 === ==== ======== ______________________ (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 and credit card loans have no stated maturities; therefore they are classified as due in one year or less.
The following table sets forth, as of December 31, 2004, the dollar amount of all loans due after December 31, 2004, based upon fixed rates of interest or floating or adjustable interest rates.
FLOATING OR FIXED RATES ADJUSTABLE RATES TOTAL ----------- ---------------- ------ (IN THOUSANDS) Mortgage(1) ................. $223,832 $ 16,548 $240,380 Installment ................. 71,929 1,402 73,331 Commercial .................. 16,540 30,502 47,042 PHEAA ....................... -- 7,355 7,355 Total .................. $312,301 $ 55,807 $368,108 __________________________ (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 $85.8 million of one- to four-family residential mortgage loans in its mortgage loan portfolio at December 31, 2004. 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, the borrower is required to obtain mortgage insurance for the amount in excess of 80%. The Registrant offers residential fixed rate loans and adjustable rate loans with amortization periods ranging from 15 to 30 years. 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 4 two percentage points per year and six percentage points over the life of the loan, and are originated for retention in the portfolio. Fixed-rate loans are underwritten in accordance with FannieMae guidelines. Currently, loans underwritten in accordance with FannieMae 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 FannieMae guidelines. At December 31, 2004, $223.6 million of the Registrant's mortgage portfolio consisted of long-term, fixed-rate mortgage loans of which $107,000 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 and commercial real estate. Essentially all originated commercial real estate loans are within 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 20 years. 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 a margin of up to 3.75%. Adjustable-rate commercial mortgage loans generally have terms of up to 20 years and no maximum interest rate. As of December 31, 2004, the Registrant's commercial real estate loans totaled $122.2 million of the mortgage portfolio. Typically, commercial real estate loans are originated in amounts up to 80% of the appraised value of the mortgaged property. The Registrant also originates loans to finance the construction of one- to four-family dwellings and commercial real estate. The Registrant makes construction loans both to individuals constructing their own residence and to developers constructing homes for resale. Generally, the Registrant only makes interim construction loans to individuals if it also makes permanent mortgage loan on the property. Interim construction loans generally have terms of up to nine months with fixed rates of interest. At December 31, 2004, construction loans totaled $19.9 million with $6.5 million of that total yet to be disbursed. 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 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. If the 5 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 90% 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 may be required. The Registrant originates automobile loans with fixed rates of interest and terms of up to five years. At December 31, 2004, home equity term loans totaled $80.5 million. COMMERCIAL LOANS. Commercial loans consist of loans secured by equipment, accounts receivables, inventory, and other business purpose loans. Such loans are generally 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 generally 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 $500,000. Loans up to $1,000,000 are approved by an officer review committee ("ORC"). The ORC consists of the President and at least four other officers appointed by the President. All loans over $1,000,000 are approved by 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 7 days of the date of issuance. At December 31, 2004, commitments to cover originations of loans totaled $22.9 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 6 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, 2004 -------------------- (IN THOUSANDS) Special Mention........................................... $24,770 Substandard............................................... 3,940 Doubtful.................................................. 259 Loss...................................................... -- ------- Total............................................... $28,969 ======= 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. 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 at or after 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. Normally, 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. As of the dates indicated, no loans were categorized as troubled 7 debt restructurings within the meaning of Statement of Financial Accounting Standards ("SFAS") No. 15 and there were no impaired loans within the meaning of SFAS No. 114, as amended by SFAS 118.
AT DECEMBER 31, ---------------------------------------------------------- 2004 2003 2002 2001 2000 ------- ------ ------ ------ ------ (DOLLARS IN THOUSANDS) Loans accounted for on a non-accrual basis: Mortgage................................................ $ 120 $ 567 $ 446 $ 940 $ -- Home equity lines of credit............................. -- -- -- -- -- Installment............................................. -- -- 77 27 -- Commercial.............................................. -- -- 96 60 -- PHEAA................................................... -- -- -- -- -- Municipal............................................... -- -- -- -- -- Credit cards............................................ -- -- -- -- -- Other................................................... -- -- -- -- -- ------- ------ ------ ------ ------ Total..................................................... $ 120 $ 567 $ 619 $1,027 $ -- ------- ------ ------ ------ ------ Accruing loans which are contractually past due 90 days or more: Mortgage................................................ 3,618 704 728 559 1,067 Installment............................................. 9 10 -- 3 10 Commercial.............................................. 954 14 41 7 157 Home equity lines of credit............................. -- -- -- -- -- PHEAA................................................... -- -- -- -- -- Municipal............................................... -- -- -- -- -- Credit cards............................................ -- -- -- -- -- Other................................................... -- -- -- -- -- ------- ------ ------ ------ ------ Total..................................................... 4,581 728 769 569 1,234 ------- ------ ------ ------ ------ Total non-accrual and accrual loans....................... 4,701 1,295 1,388 1,596 1,234 ------- ------ ------ ------ ------ Other real estate owned................................... 1,767 254 637 239 132 ------- ------ ------ ------ ------ Other non-performing assets............................... -- -- -- -- -- ------- ------ ------ ------ ------ Total non-performing assets............................... $ 6,468 $1,549 $2,025 $1,835 $1,366 ======= ====== ====== ====== ====== Total non-accrual and accrual loans to net loans.......... 1.08% 0.31% 0.39% 0.51% 0.42% ======= ====== ====== ====== ====== Total non-accrual and accrual loans to total assets....... 0.70% 0.21% 0.24% 0.30% 0.25% ======= ====== ====== ====== ====== Total non-performing assets to total assets............... 0.96% 0.25% 0.35% 0.35% 0.28% ======= ====== ====== ====== ======
As of December 31, 2004, there were no loans not reflected in the above as to which management had serious doubts as to the ability of borrowers to comply with present loan repayment loans. PROVISION FOR LOAN LOSSES. The provision for loan losses is charged to operations to bring the total allowance for loan losses to a level that represents management's best estimate of the losses inherent in the portfolio, based on a monthly review by management of the following factors: o Historical experience o Volume o Type of lending conducted by the Bank o Industry standards o The level and status of past due and non- performing loans o The general economic conditions in the Bank's lending area; and o Other factors affecting the collectability of the loans in the portfolio 8 Large groups of homogeneous loans, such as residential real estate, small commercial real estate loans and home equity and consumer loans are evaluated in the aggregate using historical loss factors and other data. The amount of loss reserve is calculated using historical loss rates, net of recoveries on a five year rolling weighted average, adjusted for environmental, and other qualitative factors such as industry, geographical, economic and political factors that can effect loss rates or loss measurements. Large balance and/or more complex loans such as multi-family and commercial real estate loans may be evaluated on an individual basis and are also evaluated in the aggregate to determine adequate reserves. As specific loans are determined to be impaired specific reserves are assigned based upon collateral value, market value, if determinable, or the present value of the estimated future cash flows of the loan. The allowance is increased by a provision for loan loss which is charged to expense, and reduced by charge-offs, net of recoveries. Loans are placed on non-accrual status when they are 90 days past due, unless they are adequately collateralized and in the process of collection. The allowance for loan losses is maintained at a level that represents management's best estimate of losses in the portfolio at the balance sheet date. However, there can be no assurance that the allowance for losses will be adequate to cover losses which may be realized in the future and that additional provisions for losses will not be required. 9 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, --------------------------------------------------------------------- 2004 2003 2002 2001 2000 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Total loans outstanding........................ $439,142 $419,571 $362,744 $317,246 $293,833 ======== ======== ======== ======== ======== Average loans outstanding...................... $430,543 $393,743 $337,600 $304,080 $279,400 ======== ======== ======== ======== ======== Allowance balances (at beginning of period)... $ 3,285 $ 2,873 $ 2,114 $ 1,919 $ 2,366 Provision: Mortgage.................................... 430 430 930 200 30 Installment................................. 38 38 25 100 30 Commercial.................................. 132 132 145 200 240 Home equity lines of credit................. -- -- -- -- -- PHEAA....................................... -- -- -- -- -- Municipal................................... -- -- -- -- -- Credit cards................................ -- -- -- -- -- Other....................................... -- -- -- -- -- Net (charge-offs) recoveries: Mortgage..................................... (1,204) (11) (219) (203) (34) Installment.................................. (125) (64) (59) (90) (72) Commercial................................... 38 (113) (63) (14) (616) Home equity lines of credit.................. -- -- -- -- -- PHEAA........................................ -- -- -- -- -- Municipal.................................... -- -- -- -- -- Credit cards................................. -- -- -- 2 (25) Other........................................ -- -- -- -- -- -------- -------- -------- -------- -------- Allowance balance (at end of period)........... $ 2,594 $ 3,285 $ 2,873 $ 2,114 $ 1,919 ======== ======== ======== ======== ======== Allowance for loan losses as a percent of total loans outstanding................... 0.59% 0.78% 0.79% 0.67% 0.65% ======== ======== ======== ======== ======== Net loans charged off as a percent of average loans outstanding.................... 0.30% 0.05% 0.10% 0.10% 0.27% ======== ======== ======== ======== ========
10 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, ---------------------------------------------------------------------------- 2004 2003 2002 --------------------- --------------------- -------------------- % OF % OF % OF LOANS LOANS LOANS TO TOTAL TO TOTAL TO TOTAL AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS ------ -------- ------ -------- ------ -------- (DOLLARS IN THOUSANDS) AT END OF PERIOD ALLOCATED TO: Mortgage....................... $1,110 57.37% $ 806 58.33% $ 2,183 57.87% Installment.................... 338 19.27 109 18.65 194 16.33 Commercial..................... 889 13.91 2,217 14.19 432 16.14 Home equity lines of credit.... 43 5.28 138 5.23 64 4.36 PHEAA.......................... 4 1.67 5 1.87 -- 1.90 Municipal...................... 210 2.29 9 1.49 -- 3.08 Credit cards................... -- 0.01 -- 0.01 -- 0.01 Other.......................... -- 0.20 1 0.23 -- 0.31 ------ ------ ------ ------ ------ ------ Total allowance.................. $2,594 100.00% $3,285 100.00% $2,873 100.00% ====== ====== ====== ====== ====== ====== AT DECEMBER 31, ------------------------------------------------ 2001 2000 --------------------- ---------------------- % OF % OF LOANS LOANS TO TOTAL TO TOTAL AMOUNT LOANS AMOUNT LOANS ------ -------- ------ -------- (DOLLARS IN THOUSANDS) AT END OF PERIOD ALLOCATED TO: Mortgage....................... $1,120 54.55% $ 651 51.95% Installment.................... 409 20.17 414 22.22 Commercial..................... 501 17.38 786 17.92 Home equity lines of credit.... 60 3.47 51 3.42 PHEAA.......................... 11 2.19 10 2.26 Municipal...................... 8 1.69 1 2.02 Credit cards................... -- 0.01 -- -- Other.......................... 5 0.54 6 0.21 ------ ------ ------ ------ Total allowance.................. $2,114 100.00% $1,919 100.00% ====== ====== ====== ======
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 accounting standards 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, 2004, the Registrant had securities classified as "available-for-sale" (which included FHLB stock) in the amount of $196.9 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, 2004, the Registrant's securities available-for-sale had an amortized cost of $195.1 million and market value of $196.9 million. 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, 2004, 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) municipal obligations, (v) banker's acceptances, (vi) certificates of deposit, and (vii) 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 FreddieMac, Government National Mortgage Association ("GinnieMae"), and FannieMae. 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., 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 FreddieMac, GinnieMae, and FannieMae make up a majority of the pass-through certificates market. 12 INVESTMENT PORTFOLIO. The following table sets forth the carrying value of the Registrant's investment securities portfolio at the dates indicated:
AT DECEMBER 31 ------------------------------ 2004 2003 2002 -------- -------- -------- (IN THOUSANDS) Securities available for sale: Obligations of U.S. government agencies ....... $ 71,103 $ 82,969 $ 80,503 Mortgage-backed securities .................... 65,004 37,656 54,104 Obligations of state and political subdivisions 46,446 37,921 38,889 Federal Home Loan Bank stock .................. 5,683 4,541 3,153 Equity securities ............................. 7,940 8,621 9,318 Other securities .............................. 716 740 750 -------- -------- -------- Total securities available for sale ........ $196,892 $172,448 $186,717 ======== ======== ========
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, 2004. Actual maturities may differ from contractual maturities as certain instruments have call features which allow prepayment of obligations.
AS OF DECEMBER 31, 2004 ------------------------------------------------------------------------------ AFTER FIVE ONE YEAR OR LESS ONE TO FIVE YEARS TO TEN YEARS ------------------------ --------------------- --------------------- CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE VALUE YIELD VALUE YIELD VALUE YIELD -------- ------- -------- ------- -------- ------- (DOLLARS IN THOUSANDS) Obligations of U.S. government agencies............. $1,006 7.13% $1,092 7.33% $62,802 3.83% Mortgage-backed securities.......... -- -- -- -- 25,124 3.88 Obligations of state and political subdivisions (1)...... -- -- 2,261 5.13 8,146 4.88 Federal Home Loan Bank stock........ -- -- -- -- -- -- Equity securities................... -- -- -- -- -- -- Other securities .................. 502 7.04% 25 2.50 -- -- ------ ------ ------- Total.......................... $1,508 7.10% $3,378 5.82% $96,072 3.93% ====== ====== ======= AS OF DECEMBER 31, 2004 --------------------------------------------------------------- MORE THAN TEN YEARS TOTAL INVESTMENT SECURITIES ---------------------- --------------------------------- CARRYING AVERAGE CARRYING AVERAGE MARKET VALUE YIELD VALUE YIELD VALUE -------- ------- -------- ------- ------ (DOLLARS IN THOUSANDS) Obligations of U.S. government agencies............. $ 6,203 4.07% $ 71,103 3.95% $ 71,103 Mortgage-backed securities.......... 39,880 4.81 65,004 4.45 65,004 Obligations of state and political subdivisions (1)...... 36,039 4.63 46,446 4.70 46,446 Federal Home Loan Bank stock........ 5,683 2.43 5,683 2.43 5,683 Equity securities................... 7,940 2.28 7,940 2.28 7,940 Other securities .................. 189 1.85 716 5.51 716 ------- -------- -------- Total.......................... $95,934 4.34% $196,892 4.19% $196,892 ======= ======== ======== ____________________ (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.
AT DECEMBER 31, ---------------------------------------------------------------------------- 2004 2003 2002 ---------------------- --------------------- -------------------- AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE RATE BALANCE RATE BALANCE RATE ------- ------- ------- ------- ------- ------- (DOLLARS IN THOUSANDS) Checking accounts: Non-interest-bearing.............. $ 80,423 -- % $ 77,862 -- % $ 71,568 -- % Interest-bearing.................. 45,791 0.39 54,788 0.58 48,375 1.05 Passbook and club accounts........... 76,356 0.51 76,641 0.70 69,776 1.48 Money market accounts................ 58,103 0.89 61,138 1.05 60,735 2.03 Certificate accounts................. 245,881 3.08 221,186 3.30 208,789 3.80 -------- ----- -------- ---- -------- ---- Total....................... $506,554 1.71% $491,615 1.79% $459,243 2.33% ======== ===== ======== ==== ======== ====
The following table indicates the amount of certificates of deposit of $100,000 or more by time remaining at December 31, 2004 (in thousands). CERTIFICATES OF MATURITY PERIODS DEPOSIT ---------------- --------------- Three months or less...................... $13,565 Over three through six months............. 6,390 Over six through twelve months............ 24,993 Over twelve months........................ 17,587 ------- Total............................... $62,535 ======= 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 $308 million. At December 31, 2004, there were outstanding $70.3 million of long-term FHLB borrowings. 15 TRUST SERVICES The Bank offers a variety of trust services including trust management, estate planning and administration, investment counseling and management and retirement planning. The Bank serves as trustee for testamentary, living, irrevocable and charitable trusts, administers investment agencies, employee benefit plans, guardianships, special needs trusts and offers separately managed accounts. The Bank's fees for these services are generally a percentage of the assets under management. As of December 31, 2004, the Bank had $110.0 million in assets under management compared to $134.8 million at December 31, 2003. The decline in assets under management in 2004 was primarily due to the mandatory redemption of a $25.0 million municipal bond issue. For the year ended December 31, 2004, the Bank had income of $340,000 from its trust services. PERSONNEL As of December 31, 2004, the Registrant had 185 full-time and 55 part-time employees. None of the Registrant's employees are represented by a collective bargaining group. SUPERVISION AND REGULATION REGULATION OF THE COMPANY Set forth below is a brief description of certain laws which related to the regulation of the Company and the Bank. The description does not purport to be complete and is qualified in its entirety by reference to applicable laws and regulations. GENERAL. The Company, as a bank holding company registered under the Bank Holding Company Act of 1956, as amended, is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System and by the Pennsylvania Department of Banking. The Company is also required to file annually a report of its operations with the Federal Reserve and the Pennsylvania Department of Banking. 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 the Bank. Under the Bank Holding Company Act, 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 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 16 is the Federal Reserve policy 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 Bank Holding Company Act. Under the Bank Holding Company Act 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 Bank Holding Company Act and (2) any non-banking 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 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 if each of its subsidiary banks is well capitalized, well managed, and 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. In fiscal 2000, the Company submitted the required notice to the Federal Reserve and became a financial holding company. REGULATORY CAPITAL REQUIREMENTS. The Federal Reserve has adopted capital adequacy guidelines under which it assesses the adequacy of capital in examining and supervising a bank holding company and in analyzing applications to it under the Bank Holding Company Act. The Federal Reserve's capital adequacy guidelines are similar to those imposed on the Bank by the Federal Deposit Insurance Corporation. See "Regulation of the Bank - Regulatory Capital 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 that have caused its 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 Federal Deposit Insurance Corporation. 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 17 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." REGULATION OF THE BANK GENERAL. As a Pennsylvania-chartered commercial bank with deposits insured by the Federal Deposit Insurance Corporation which is not a member of the Federal Reserve, the Bank is subject to extensive regulation and examination by the Pennsylvania Department of Banking and by the Federal Deposit Insurance Corporation, 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 Pennsylvania Department of Banking, the Federal Deposit Insurance Corporation or the United States Congress, could have a material impact on the Company and its operations. Federal law provides the federal banking regulators, including the Federal Deposit Insurance Corporation and the Federal Reserve, with substantial enforcement powers. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders, and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities. PENNSYLVANIA BANKING LAW. The Pennsylvania 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 code delegates extensive rule-making power and administrative discretion to the Pennsylvania Department of Banking 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 code also provides state-chartered commercial banks with the powers to make certain leeway investments, subject to regulation by the Pennsylvania Department of Banking. The Federal Deposit Insurance Corporation Act, however, prohibits a state-chartered bank 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 Federal Deposit Insurance Corporation determines the activity or investment does not pose a significant risk of loss to the appropriate deposit insurance fund and (2) the bank meets all applicable federal capital requirements. Accordingly, the additional operating authority provided to the Bank by the code is significantly restricted by the Federal Deposit Insurance Act. 18 FEDERAL DEPOSIT INSURANCE. The Federal Deposit Insurance Corporation 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 Federal Deposit Insurance Corporation administers two separate insurance funds, the Bank Insurance Fund, which generally insures commercial bank and state savings bank deposits, and the Savings Association Insurance Fund, which generally insures savings association deposits. The Bank is a member of the Bank Insurance Fund and its deposit accounts are insured by the Federal Deposit Insurance Corporation, up to prescribed limits. The Federal Deposit Insurance Corporation is authorized to establish separate annual deposit insurance assessment rates for members of the Bank Insurance Fund and the Savings Association Insurance Fund, and to increase assessment rates if it determines such increases are appropriate to maintain the reserves of either insurance fund. In addition, the Federal Deposit Insurance Corporation is authorized to levy emergency special assessments on Bank Insurance Fund and Savings Association Insurance Fund members. The Federal Deposit Insurance Corporation's deposit insurance premiums are assessed through a risk-based system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums based upon their level of capital and supervisory evaluation, with the assessment rate for most institutions set at 0%. In addition, all institutions with deposits insured by the Federal Deposit Insurance Corporation are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, an agency of the Federal government established to recapitalize the predecessor to the Savings Association Insurance Fund. The current quarterly assessment rate is approximately 0.0146% of insured deposits. These assessments will continue until the Financing Corporation bonds mature in 2017. REGULATORY CAPITAL REQUIREMENTS. The Federal Deposit Insurance Corporation has promulgated capital adequacy requirements for state-chartered banks that, like the Bank are not members of the Federal Reserve System. At December 31, 2004, the Bank exceeded all regulatory capital requirements and was classified as "well capitalized." The Federal Deposit Insurance Corporation's capital regulations establish a minimum 3% Tier 1 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 1 leverage ratio for such other banks to 4% to 5% or more. Under the Federal Deposit Insurance Corporation's regulation, the highest-rated banks are those that the Federal Deposit Insurance Corporation 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 1 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 mortgage and non-mortgage servicing assets and purchased credit card relationships. The Federal Deposit Insurance Corporation'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 1 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 Federal Deposit Insurance Corporation believes are inherent in the type of asset or item. The components of Tier 1 capital for the risk-based 19 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 to 100% of Tier 1 capital. A bank that has less than the minimum leverage capital requirement is subject to various capital plan and activities restriction requirements. The Federal Deposit Insurance Corporation's regulations also provide that any insured depository institution with a ratio of Tier 1 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 Federal Deposit Insurance Act and could be subject to termination of deposit insurance. The Bank is also subject to minimum capital requirements imposed by the Pennsylvania Department of Banking on Pennsylvania-chartered depository institutions. Under the Pennsylvania Department of Banking's capital regulations, a Pennsylvania bank or savings bank must maintain a minimum leverage ratio of Tier 1 capital (as defined under the Federal Deposit Insurance Corporation's capital regulations) to total assets of 4%. In addition, the Pennsylvania Department of Banking 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 with both the Federal Deposit Insurance Corporation and the Pennsylvania Department of Banking capital requirements as of December 31, 2004. AFFILIATE TRANSACTION RESTRICTIONS. Federal laws strictly limit the ability of banks to engage in transactions with their affiliates, including their bank holding companies. In particular, loans by a subsidiary bank to 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 other 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 Federal Home Loan Bank of Pittsburgh, which is one of 12 regional Federal Home Loan Banks. Each Federal Home Loan Bank 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 Federal Home Loan Bank system. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the Federal Home Loan Bank. As a member, it is required to purchase and maintain stock in the Federal Home Loan Bank of Pittsburgh in an amount equal to 5% of its outstanding residential mortgage loans plus .7% of its unused maximum borrowing capacity. At December 31, 2004, 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, 2004, the Bank met its reserve requirements. 20 ITEM 2. PROPERTIES ------------------- At December 31, 2004, the Registrant operated from its main office, six 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, 2004, was approximately $6.2 million. The main office of the Company and of the Bank and three branch offices are owned by the Bank and the remaining four branch offices, five supermarket branch offices, and the Bank's trust division, are leased by the Bank. These leases have initial terms of one to twenty 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, 2004. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS -------------------------------------------------------------------------------- AND ISSUER PURCHASES OF EQUITY SECURITIES ----------------------------------------- (a) MARKET FOR COMMON EQUITY. The information contained under the section captioned "Stock Market Information" in the 2004 Annual Report to Stockholders (the "Annual Report") is incorporated herein by reference. The Registrant did not sell any equity securities that were not registered under the Securities Act of 1933 during the period under report. (b) USE OF PROCEEDS. Not applicable (c) ISSUER PURCHASE OF EQUITY SECURITIES. No purchases of shares of Common Stock were made by or on behalf of the Registrant during the fourth quarter of the fiscal year under report. ITEM 6. SELECTED FINANCIAL DATA -------------------------------- The information contained in the table captioned "Selected Financial Information" in the Annual Report is incorporated herein by reference. 21 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 15 herein are incorporated herein by reference from the Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND -------------------------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- Not applicable. ITEM 9A. CONTROLS AND PROCEDURES --------------------------------- (a) DISCLOSURE CONTROLS AND PROCEDURES The Company's management evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company's disclosure controls and procedures, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. (b) INTERNAL CONTROL OVER FINANCIAL REPORTING Management's Report on Internal Control Over Financial Reporting and the Attestation Report of its Registered Public Accounting Firm are incorporated herein by reference from the Annual Report. There were no changes in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. ITEM 9B. OTHER INFORMATION --------------------------- Not applicable. 22 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 definitive Proxy Statement for the 2005 Annual Meeting of Stockholders ("Proxy Statement") is incorporated herein by reference. The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. A copy of the Company's Code of Ethics will be furnished, without charge, to any person who requests such copy by writing to the Secretary, IBT Bancorp, Inc., 309 Main Street, Irwin, Pennsylvania 15642. 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) CHANGES IN CONTROL 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. 23 (d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS Set forth below is information as of December 31, 2004 with respect to compensation plans under which equity securities of the Registrant are authorized for issuance.
EQUITY COMPENSATION PLAN INFORMATION (a) (b) (c) NUMBER OF SECURITIES NUMBER OF SECURITIES WEIGHTED-AVERAGE REMAINING AVAILABLE FOR TO BE ISSUED UPON EXERCISE PRICE OF FUTURE ISSUANCE UNDER EQUITY EXERCISE OF OUTSTANDING COMPENSATION PLANS OUTSTANDING OPTIONS, OPTIONS, WARRANTS (EXCLUDING SECURITIES WARRANTS AND RIGHTS AND RIGHTS REFLECTED IN COLUMN (A)) ------------------- ----------------- -------------------------- Equity compensation plans approved by shareholders: 2000 Stock Option Plan............... 102,089 $31.13 150,000 Equity compensation plans not approved by shareholders......... -- -- -- ------- ------ ------- TOTAL.......................... 102,089 $31.13 150,000 ======= ====== =======
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 - - Certain Relationships and Related Transactions" of the Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES ------------------------------------------------ The information called for by this item is incorporated herein by reference to the section entitled "Ratification of Appointment of Accountants" in the Proxy Statement. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENTS ---------------------------------------- (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 condition of IBT Bancorp, Inc. and subsidiary as of December 31, 2004 and 2003, 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, 2004, together with the related 24 notes and the independent auditors' report of Edwards Sauer & Owens, P.C., independent registered public accounting firm. 2. Schedules omitted as they are not applicable.
3. Exhibits 3(i) Articles of Incorporation of IBT Bancorp, Inc.* 3(ii) Amended Bylaws of IBT Bancorp, Inc.** 4.1 Rights Agreement, dated as of November 18, 2003 by and between IBT Bancorp, Inc. and Registrar and Transfer Company***** 10 + Change In Control Severance Agreement with Charles G. Urtin*** 10.1 + Deferred Compensation Plan For Bank Directors*** 10.2 + Death Benefit Only Deferred Compensation Plan For Bank Directors effective as of January 1, 1990*** 10.3 + Retirement and Death Benefit Deferred Compensation Plan For Bank Directors effective as of January 1, 1990*** 10.4 + 2000 Stock Option Plan**** 10.5 + Irwin Bank & Trust Company Supplemental Pension Plan 13 Portions of the 2004 Annual Report to Shareholders 21 Subsidiaries 23 Consent of Edwards, Sauer & Owens, P.C. 31.1 Rule 13a-14(a) Certification of Chief Executive Officer 31.2 Rule 13a-14(a) Certification of Chief Financial Officer 32 Section 1350 Certification _________________________ + Management contract or compensatory plan or arrangement. * Incorporated by reference to the identically numbered exhibits of the Registrant's Form 10 (File No. 0-25903) filed April 29, 1999. ** Incorporated by reference to the identically numbered exhibits of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 2002. *** Incorporated by reference from the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. **** Incorporated by reference to the Form S-8 Registration Statement (File No. 333-40398) filed with the SEC on June 29, 2000. ***** Incorporated by reference to Amendment No. 1 to Form 8-A Registration Statement (File No. 001-31655) filed with the SEC on November 20, 2003.
25 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, 2005. 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 as of March 16, 2005 by the following persons on behalf of the registrant and in the capacities indicated. /s/ Charles G. Urtin /s/ Thomas E. Deger ----------------------------------------------- ----------------------------- Charles G. Urtin, President, Chief Executive Thomas E. Deger Officer, and Director Director (Principal Executive Officer) /s/ Richard L. Ryan /s/ John N. Brenzia ----------------------------------------------- ----------------------------- Richard L. Ryan John N. Brenzia Director Director /s/ Charles W. Hengenroeder /s/ Robert C. Whisner ----------------------------------------------- ----------------------------- Charles W. Hengenroeder Robert C. Whisner Director Director /s/ Grant J. Shevchik /s/ Robert Rebich, Jr. ----------------------------------------------- ----------------------------- Grant J. Shevchik Robert Rebich, Jr. Director Director /s/ Raymond G. Suchta /s/ Richard J. Hoffman ----------------------------------------------- ----------------------------- Raymond G. Suchta Richard J. Hoffman Senior Vice President and Chief Financial Officer Director (Principal Financial and Accounting Officer)